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Originally Posted by C. C. Rider
Second, you are overlooking the fact that property insurers have RE-insurers which provide insurance to them in case of catastrophic losses. In other words, the insurance companies have insurance too to protect them against unusually large losses.
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I didn’t mention reinsurance in my previous post because it’s something many folks aren’t familiar with, and I didn’t want to muddy the waters. In its simplest form, reinsurance is just insurance risk traded in a private market between insurance companies. Reinsurers typically don’t actually write policies, they just assume risk, for a price, from other insurers that actually do write policies and need to offload risk to balance their portfolios overall risk profile. The property and casualty insurance business is all about properly pricing and diversifying risk, so statistically they will make a reasonable profit in the long run after cashing premium checks and paying out claims. Diversifying risk is of the absolute most paramount importance, so no single, or sequence of, unpredictable events will cause the entity a catastrophic loss. Reinsurers are no different than regular insurance companies in that they want to hold a very well diversified portfolio of properly priced risk. Unfortunately, tropical storms have become both more severe and less predictable, so pricing and managing the risk has become more problematic. At the same time, populations have migrated to areas like the Florida coastlines increasing the number of insured properties, while insured property values have skyrocketed, and insurers (both traditional and reinsurers) have no additional appetite for assuming more tropical storm risk without HUGH increases in premiums. Why did Farmers make the difficult decision to totally pull out of the Florida market? Because it got too expensive to reinsure the risk they needed to offload to have what they considered a properly diversified portfolio.
I’ll stop there, except to say that the insurance market is totally saturated with its ability to continue to absorb more tropical storm risk, without a very large corresponding increase in premiums. Think of in terms of a stock portfolio, which people can more easily understand. No one wants to own a portfolio of a few stocks, all in the same risky industry, with no diversification. If one event happens that totally rocks that particular industry, their portfolio would be toast.
Dam, I need a beer, I’m glad I retired from that $hit. I much prefer worrying about getting a good t time or an empty lane in a sports pool to swim laps. The important things in life : )