Tuesday, August 18, 2009

Hurricane season better late than never for insurers (ACE; BRK.A; CB; TRV). And: Riding Naked Through the Storm

From Reuters:
The first hurricane of the 2009 Atlantic season may end up skipping past the United States, leaving insurers to hope that the next ominous storm clouds will come ashore with a silver lining.

Insurers can face billions of dollars in claims when monster hurricanes strike populated areas, but they often make their money back -- and more -- in the following months because they can charge more to renew coverage.

Disasters ranging from hurricanes to earthquakes and jet accidents tend to create demand, and, if severe and frequent, ramp up the cost of coverage.

Before last weekend, no tropical depressions had formed, in contrast to last year when five named storms had already swirled into the Atlantic basin.

"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.

That would be bad news for insurers who have seen prices decline significantly in the past three years.

Even the first major storm of the season, Hurricane Bill, which forecasters expect to strengthen into a strong Category 3 storm, may have little impact on insurers....

...Major players providing catastrophe coverage include the insurance unit of Warren Buffett's Berkshire Hathaway, Travelers Cos Inc and a recently renamed AIG division, Chartis.

AIG had been the most dominant in the sector but has seen some business slip away since the parent company's financial problems spooked buyers. Insurers such as Travelers, Chubb Corp and Ace Limited have said they are gaining market share.

While Berkshire has kept lots of capital on the sidelines recently, and underwrote much less insurance in the latest quarter, it appears ready to jump back into the market if prices start rising....MORE

Why buy insurance if you can expect a federal government bailout. From ClimateWire via the New York Times:

States Shed Reinsurance and 'Run Naked' Through Storm Risks

Several states prone to natural disasters are measuring the odds on a mega-bet. Concerned observers say those calculations are based on "Lady Luck" and "rolling the dice."

Public insurance programs in some coastal states are flirting with the notion of saving millions of dollars every year by shrinking or canceling the coverage they buy from private reinsurers -- the deep-pocketed companies that insure insurers whose exposure to loss exceeds the budgets of some nations.

States are the insurers in this case. And they are either tired of paying piles of cash for reinsurance policies that are rarely needed, or too broke financially to maintain coverage that has saved state residents from paying billions in hurricane damage claims. In the parlance of the insurance business, without coverage or a hedge against their expensive risks, they are "running naked."

Here's the bet: Save hundreds of millions with no disaster, or pay perhaps billions with one.

"It's actively discussed every year," John Golembeski, president of Massachusetts' public insurance program, said of discontinuing the state's reinsurance policy. The price this year was $80 million. In return, the reinsurer promises to pay $900 million in claims if a storm sweeps ashore.

Golembeski makes sure those decisions, made by money-counting legislators, are accompanied by a weather warning: "We don't know when it's going to hit."

Texas wins big, then rolls the dice

Other states are more muscular in their movement away from reinsurance. Texas let its policy die at the end of May, less than a year after reinsurers paid $1.5 billion in claims related to Hurricane Ike. That's not a bad return on the state's investment. Texans paid $180 million for the policy....MUCH MORE
Any odds on how fast legislators will be demanding that Washington cover their losses, should their "bet" (heads I win, tails you lose variant) not work out?