How a Small Group of Firms Changed the Math for Insuring Against Natural Disasters
How a Small Group of Firms Changed the Math for Insuring Against Natural Disasters
Excerpt from this story from the New York Times:
As disasters like the wildfires that devastated the Hawaiian town of Lahaina and the storms that tore apart roofs from Alabama to Massachusetts last week intensify, insurance companies have pulled back from offering coverage in certain areas or cut the kinds of damage they will pay to repair.
A little-noticed slice of the financial industry that provides insurance to insurers, called reinsurance, has helped drive the changes.
These companies promise to step in with cash — usually huge amounts — when something like a hurricane, wildfire or other big disaster creates damage that is too costly and widespread for insurance companies to pay for on their own. And at the beginning of the year, nearly all of them raised prices.
In the weeks leading up to Jan. 1, when about half of reinsurance policies are renewed for the year, reinsurers broke the news to insurance companies across the United States and Canada — from large national carriers like State Farm and Farmers to smaller, more specialized firms — that their prices were going up. That led to a flurry of tense negotiations between those insurers and firms, like Swiss Re, Odyssey Re and other reinsurers, many of whom are headquartered outside of the United States.
Reinsurers’ increased prices have accelerated changes in an industry grappling with a new sense of uncertainty. The world is warming; storms are getting more intense; inflation has increased the cost of rebuilding after a disaster; and a global increase in interest rates is making money itself more expensive.
Since the beginning of the year, insurance companies have paid out $40 billion to U.S. customers, putting them on track for another record in yearly losses. At every level, the costs of guarding against risk are rising and everyone, from the leaders of large companies to the owners of homes and small businesses, is feeling the squeeze.