09 November 2010

Not Enough Hurricane Losses

Understanding the reinsurance industry can be counter-intuitive.  One might think that they want to avoid big disasters, because that means that claims must be paid.  To some degree this is true.  But the reality is that the industry needs disasters to thrive, after all that is what its business is all about.  Presently, the industry is awash in capital due to a dearth of disasters, putting pressure on premiums and share prices:
Insurance and reinsurance prices have been falling across most business lines for two years, reflecting intense competition between well-capitalised insurers and a comparative dearth of major catastrophe-induced losses.

Hiscox on Monday said it expected prices to come under additional pressure in the run-up to key annual policy renewals in January, blaming an absence of major storms during the June-to-November hurricane season in the United States.

Insurance and reinsurance prices typically jump after big hurricanes as a welter of claims eats into insurers' capital, forcing less well-funded players to retrench and freeing those still in the market to charge more.
Any market situation where the interests of investors run counter to the interests of society deserves a close look.