RMS version 11 model change (2011)
The 2011 update to RMS's North Atlantic hurricane model, which raised modeled losses on many US portfolios and remains the textbook case of a model change.
RMS (Risk Management Solutions) version 11 is the update to the modeler's North Atlantic hurricane model released in 2011, and the market still treats it as the textbook case of a model change that moves capital. It raised modeled losses sharply for many US portfolios, especially away from the coast. The main driver was how hurricanes weaken after landfall: RMS recalibrated that decay, and winds stayed strong longer inland. For some portfolios the 1-in-100 probable maximum loss (PML) went up by several tens of percent; others barely moved, depending on their split between coast and inland. Modeled losses feed pricing, zonal accumulation limits and reinsurance plans, so a new model version reaches the whole underwriting chain. The shock traveled down the usual chain. Rating agencies and regulators read PMLs, cedents' capital needs follow, and so does reinsurance demand. The June 2011 Florida renewals were negotiated with the new numbers on the table. The criticism was sharp, because the increase came with no recent major loss to justify it and the other commercial models did not move by the same amount. Several cedents phased the adoption over more than one year, or blended the old and new versions while they worked out what had changed. The market kept a habit from it: run several models, weight them and build its own view of risk instead of taking raw output. Whenever a modeler announces a new version, version 11 comes back into the negotiation, and the first question is about the adoption timetable.
Textbook case, made-up figures: a Florida cedent buys reinsurance up to its 1-in-100 PML, 1.2 billion dollars under the old version. Under the new one, the same portfolio comes out at 1.55 billion. Holding the same return period means 350 million of extra capacity, at an 8% rate on line, or 28 million of additional premium. If it keeps its tower as is, its cover drops below the 1-in-100 level, and the rating agency will see it in the next filing.
RMS v11, RiskLink 11, RMS 2011 model change, RMS version 11 hurricane model
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