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.
4 comments:
This is consistent with Re's inflating climate forecasts (AGW) for Tropical Cyclones
Insurance is an interesting way to grow capitol.
Normal Business -
Income - Expenses = Taxable Profits
Insurance
Income - (Expenses plus anticipated future losses) = Taxable profits
Without an occasional big disaster it's difficult for insurance companies to avoid sharing with the tax man, as the tax man questions whether the 'anticipated future losses' are realistic.
I suppose the folks in Pakistan were not well insured. Or Haiti.
And if the steering currents in the Atlantic had been different this year, they might be paying out a lot in the states.
'Any market situation where the interests of investors run counter to the interests of society deserves a close look.'
That's tricky stuff, Roger? I see your point, and it's sometimes true, for example anti-trust. But it's not clear to me that cycles of reinsurance pricing (sometimes too cheap, sometimes too dear) are counter to society's interests?
The interests of investors are (generally) a decent return on investment, the decenter the better. I'm struggling, in any sector which doesn't fall foul of the FTC (they are there for this sort of thing), to think of the sort of examples you mean.
It's surely not true in reinsurance and insurance - after all, Warren Buffett himself complained vigorously when the US government bailed out AIG thereby DEPRIVING Buffett's companies from the profits from higher rates their prudence entitled them to when everone else had gone bust.
:)
More seriously, so long as the barriers to entry are not too difficult (which they may get in long-tail reinsurance) your sentence is a bit apple pie?
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