The insurance industry is currently hoping for a late summer rally of its own- in multi-billion dollar, hurricane-related destruction. After suffering through three years without an epic success like Hurricane Katrina, insurers are getting a little anxious that it’s mid-August and the death and destruction counter from tropical storms this year is barely registering.
“If there are no major storms, more capacity will become available and prices will start to come down,” Shivan Subramaniam, chief executive of commercial property insurer FM Global, said in an interview…Subramaniam estimated that a storm must incur between $9 billion and $10 billion in insured losses to convince already strapped customers they need to pay more for coverage.
Just what the world needs now- mother nature giving AIG another bailout.
Thanks to a DB reader, a good example of what the insurance companies are crossing their fingers for follows after the jump.
Before Hurricane Ike:
One Year Later:
Hurricane season better late than never for insurers [Reuters]
Greg,
Do you get paid per post?
@1
I’m thinking his pay must be based on the number of insults hurled at him and his mom.
wait…so insurance companies make money when they pay out claims? and even though they’re all pulling out of florida because it’s not profitable to insure houses that are blown away every year…they’re hoping for more storms to drum up business? greg, I had hope for you before, but now I’m on the hating greg wagon, you found an article written by a moron.
3,
Premiums go up, you fucking retard.
@2 Then he must be filthy rich.
I don’t think @3 has ever seen the chart of an insurer’s stock some months after such hurricanes blow through. Seeing such a chart would indicate intelligence on his/her part. Until then we must presume @3 is working on a chef’s degree at the Culinary Institute and is currently handling “mountain oysters” with too much comparative interest.
The point here is that insurance companies pull out of a region when ANYTHING gets ugly. They pulled out of the high risk areas in South Florida right after Hurricane Andrew; they pulled out of the Gulf Coast after Katrina. Here in FL the high risk areas are insured by the state. So with the budgets already in tatters imagine if mother nature deals a shitty hand this Hurricane Season (Gulp).
@Naked – let’s compare the rates paid per $ of coverage in Florida vs. some of your peers in the Northeast. I’m fairly close to Long Island Sound, but not direct waterfront….premiums/insured amount = 32 basis points. What do you pay? My sense is Floridians have been getting a sweet deal over the years given the whole f-ing state is high risk. Despite this, when one hits, they’ll want us to bail them out.
@4, @6 After Katrina insurance companies couldn’t pay up, the point is that insurance companies work on the law of large numbers…the idea that they won’t have a large number of claims at the same time. A large disaster goes against that. I used to live in Florida, and getting home owners insurance within 25 miles of the coast is almost impossible because most of the companies have pulled out because, even with the higher premiums, it’s not profitable. State Farm will not insure a house within 25 miles of the coast of Florida. You make money when you can raise premiums without having to payout. Hence the last few years AFTER the bad hurricane seasons they’ve made money, but it has proven too little to offset the massive amounts of money they had to payout when the storms did hit.
@9. FYI the law of large numbers is that over time the averages work out. It says nothing about the deviation of a particular event.
It’s more to do with mis-management, ability to make more profit elsewhere, or simply not wanting to deal with the issues necessary to make it profitable, topped with a normal model with a fat-tailed situation.
It’s easy to fix–you charge more or you pay more. People just don’t want to pay for what it actually costs to replace an entire home once every 20 years so you cut corners to bring it down in order to get market share only to have it bite you in the ass because you didn’t charge enough. Or you are the homeowner and you didn’t want to pay the extra money to properly build your home, not realizing you were just shifting the cost to the insurance and screwing yourself.
The result in FL is that the state steps in to assume the risk, thereby concentrating it all in the state (well, technically its not all in the state given that they have assets elsewhere, but close enough), rather than a company spreading it out over the globe, and making the model effectively even more fat-tailed.
What can I say? People are just cheap.
-math guy
@10/math guy
Although he could have stated it with better precision, there’s no error in 9′s argument.
Consider the St. Petersburg paradox. Pricing insurance properly is a non-trivial exercise.
@8 here is the breakdown: Our homeowners + flood + wind storm is currently running at 19.5 bips. BUT in our case we have a 400 bips deductible on any claim be it fire, or windstorm.