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Are Territorial Rating Models Outdated in Residential Property Insurance Markets? Evidence From the Florida Property Insurance Market

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  • Charles M. Nyce
  • Patrick Maroney

Abstract

The fundamental shift in rating methodology from historical loss costs to catastrophe modeling for windstorm coverage calls into question the accuracy of rates developed using rating territories. Using premiums and modeled average annual loss (AAL) estimates from Citizens Property Insurance Corporation (Citizens) in Florida, this article analyzes the use of distance to coast (DtC) as a rating variable in providing coverage for the windstorm peril in homeowners insurance. Catastrophe models used to generate AAL costs do not rely on the same application of the law of large numbers as using historical loss costs and thus allows for more granular pricing of the windstorm peril. The results show that DtC, a rating variable that is property specific, more closely aligns premiums and AALs than territorial rating, and allows more granular pricing of the windstorm peril. More granular risk based pricing provides better incentives for homeowners regarding location and mitigation choices and may help reduce aggregate exposure to windstorm damages in the long run.

Suggested Citation

  • Charles M. Nyce & Patrick Maroney, 2011. "Are Territorial Rating Models Outdated in Residential Property Insurance Markets? Evidence From the Florida Property Insurance Market," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 14(2), pages 201-232, September.
    • Handle: RePEc:bla:rmgtin:v:14:y:2011:i:2:p:201-232
    DOI: j.1540-6296.2011.01204.x
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    File URL: https://doi.org/10.1111/j.1540-6296.2011.01204.x
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    References listed on IDEAS

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    Cited by:

    1. Terry Dinan & Perry Beider & David Wylie, 2019. "The National Flood Insurance Program: Is It Financially Sound?," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(1), pages 15-38, March.
    2. Ron Cheung & Cassandra R. Cole & David A. Macpherson & Kathleen A. McCullough & Charles Nyce, 2015. "Demographic Factors and Price Distortions in Insurance," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 18(1), pages 1-28, March.
    3. Dong Wang & Rachel A. Davidson & Joseph E. Trainor & Linda K. Nozick & Jamie Kruse, 2017. "Homeowner purchase of insurance for hurricane-induced wind and flood damage," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 88(1), pages 221-245, August.
    4. James M. Carson & Kathleen A. McCullough & David M. Pooser, 2013. "Deciding Whether to Invest in Mitigation Measures: Evidence From Florida," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 309-327, June.

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