How are hurricane insurance rates set?
While procedures vary, insurers generally use sophisticated probabilistic models to assess the wide range of hurricane activity that can occur over the long-term. These models use a meteorological database of tropical cyclones of over 100 years; sophisticated wind field algorithms; actual historical hurricane characteristics and costs; engineering expertise; etc. to develop reliable estimates of expected hurricane losses — by geographic area, by construction type, by deductible purchased, etc. These models provide a much more stable and reliable measure of insurance rates than would result from the use of past hurricane claims alone — because hurricane activity is very volatile from year to year. If such volatile hurricane loss data were to be primarily relied upon, rather than stochastic models, insurance rates could swing wildly upward and downward from one year to the next — solely due to the occurrence (or absence) of a major hurricane. So, in addition to bringing more accuracy
