What RMS v23 Means for Property Insurance Buyers

The U.S. property insurance market has been buffeted by growing catastrophe activity, adjustments in values, inflation, and upheaval in the reinsurance market, all of which have fueled an increase in pricing. Buyers are experiencing extreme fatigue and wondering when the difficult market conditions will end.

Unfortunately, the end is not in sight — and conditions could worsen before they improve. In June, Moody’s RMS, one of the leading catastrophe risk modeling companies, released a new version (v23) of its North Atlantic Hurricane Model. The update was informed by recent hurricane activity, industry losses, data, research and insights form recent seasons.

The changes introduced in v23 —the most significant update to RMS’ North American model in over a decade — could have a significant impact on modeled outcomes, program structure, surplus requirements and pricing. For property insurance buyers, it is important to understand the model changes, as well as their potential implication for insurance programs.

What’s changing in RMS v23?

An initial analysis by Lockton shows that RMS v23 will result in an increase to commercial property losses across the U.S. of up to 30%. Locations along the Gulf of Mexico and in Texas, Florida, and elsewhere in the Southeastern U.S. will be most impacted.

The effect on residential lines is more varied, with the magnitude of change ranging from -20% to 20%. Within residential lines, the mid-Atlantic and Northeastern U.S. are the only regions for which decreases in modeled losses are projected.

Moody’s projections are based on its Industry Exposure Database, which provides a generic view of exposure nationally. Aside from regional criteria, building characteristics will also play a role in changes for individual portfolios. The actual impact on individual locations and portfolios could deviate significantly from these ranges, however, once carriers begin adopting the latest model version.

Market impact

Property insurers are still analyzing the new model, but we expect to see an impact on underwriting policies over the course of 2024.

Although RMS remains an industry standard and is widely utilized in assessing risk, a multi-model approach is becoming more commonplace. Whether an individual carrier uses a single model view, or a blended view of risk will inform the magnitude of impact this update has on its overall portfolio.

The broader portfolio impact of the new model may necessitate further rebalancing of books across insurance and reinsurance markets. Increased treaty retentions may be combined with additional capital requirements from rating agencies.

Dislocation in the reinsurance market may also continue. This could be a result of either continued increases for catastrophe treaty retentions or added rate pressure.

As RMS v23 is rolled out, it is important for property insurance buyers to discuss these possible changes with their brokers early. They should also work with their brokers to understand the impact of the new model on program structure and pricing and plan for contingencies. Analytics can be critical to this process and to negotiations with property underwriters.

Lockton will continue to monitor the impact of RMS v23 on the insurance market. For more information, contact a member of your Lockton team.