Pricing the Hurricane Peril - Change is Overdue

The hurricane peril is currently a very hot topic at Casualty Actuarial Society meetings and seminars. The advent of this interest occurred in the aftermath of Hurricane Andrew, which made landfall in Homestead, Florida on august 24, 1992. Hurricane Andrew damaged or destroyed thousands of buildings and caused an estimated $16 billion in insured losses. Insured damage of this proportion was unprecedented, and could have been much greater had the hurricane taken a slightly different but equally likely track. In response, actuaries began to seriously reevaluate their ratemaking procedures for this peril. In this paper I will document the history of ratemaking techniques used for the hurricane peril. Non-insurance data will be presented to show that historical technique and typical insurance incurred loss data are inappropriate to properly price this peril. I will concentrate on expected loss costs for hurricanes, or in other words the mean of the potential loss distribution. The concept of risk load will be left to other authors in our society.