The purpose of this bulletin is to advise interested parties of the current position of the Texas Department of Insurance (Department) on the use of mathematical catastrophe simulation models (models) in property insurance ratemaking. It is also intended to describe the steps the Department is currently taking to study the reasonability and conditions of their use. This bulletin replaces Commissioner's Bulletin No. B-0015-98, dated February 19, 1998.
Because of the increasing industry reliance on the use of models, the Department has been examining their use in property insurance ratemaking. The Department has identified two areas of concern at this time. First, it is clear from examining the results of the models that have been submitted to the Department that the resulting catastrophe provisions, and hence the rates, may differ significantly depending on both the specific model selected and the insurer inputs to that model. The second area of concern is that models of which the Department is aware are proprietary models, and the details of their inner workings have not generally been available. Given the uncertainties surrounding the models, it is difficult for the Department to determine that rates with catastrophe provisions produced solely or largely from models meet the standards set forth in Texas Insurance Code, Article 5.101 (that rates be just, reasonable, adequate and not excessive for the risks to which they apply) or Article 5.13-2 (that rates not be excessive, inadequate, or unfairly discriminatory and not be unreasonable).
The Department has, therefore, convened an internal working group to study the use of catastrophe modeling in property insurance ratemaking. This group is reviewing the broad issues raised by the use of models as well as determining the type of information to which the Department would need to have access to assure that statutory standards are met. The Department has retained outside experts in the areas of meteorology and engineering to assist it in its efforts. The Department may also seek input from interested parties.
It should be clear that nothing prevents an individual company making a rate filing under Art. 5.101 or Art. 5.13-2 from including with its filing whatever data, including models, it considers appropriate to support the rate filing. In the interim, before the uncertainties and issues are finally resolved, the Department may request certain additional information from companies that use models in property insurance rate filing in order to assist staff in evaluating the reasonability of the rate filing. Staff may request information that includes: (1) indicated catastrophe provision based on traditional actual historical experience data methodology and a comparison of the two provisions; (2) an explanation of the reasons for any differences; and (3) information on the model simulations, including, for example, the number of simulated storms by intensity, and a description of the company-supplied inputs to the model.
Questions on the internal working group and other aspects of the study may be directed to Joe Palermo, Chief Economist of the Department, at 512-305-7194, who is heading the project. Questions regarding rate filings should be directed to the Property and Casualty Actuarial Unit at 512-475-3017.
Sincerely,
C. H. Mah
Senior Associate Commissioner
Property and Casualty