Friday, September 19, 2014

How Different Insurance Actors Handle Recent Changes in Market Judgment of Risk

A dominant characteristic of the insurance market right now is that it does not have enough large loss to maintain pricing stability.  On Monday, the Insurance Journal ran three different stories that demonstrate several types of institutional behavioral responses to changes in the market judgement of risk.

The first article covered the recent Reinsurance Rendezvous, an annual event in Monte Carlo where the world's reinsurers get together and do whatever it is that they do behind closed doors such as, throw lavish parties.  The article reported that reinsurers are very much disgruntled with market pressure to bring their pricing down.   According to the article, originally from Reuters, Nikolaus von Bomhard, chief executive of Munich Re  claimed, “I am disappointed, exasperated, and even rather appalled by what is happening in the market."

Reinsurance shareholders are expected to benefit from the market dynamic.  The article reports, “Returning capital to shareholders reduces the pressure to do something that has higher risk,” said Moody’s analyst Stan Rouyer.  Earlier this year year, Swiss Re was reported to have done this in the form of a special dividend.

In the second article, the Insurance Journal reported that the Louisiana Citizens Property Insurance Corporation seeks to lower rates for a handful of residential policyholders and, overall, for some commercial policyholders.  The reason for the change is reported as the cost of reinsurance.   Here, the ability to offload more risk onto reinsurers for cheap has led to lower overall pricing for the public.

In the third article, the Insurance Journal reported that primary insurers (i.e. State Farm, Farmers and Allstate) in Texas are increasing homeowners rates.

The article reports the primary insurers are claiming that increased risk warrant raising rates,
Luis Sahagun, a spokesman for Farmers, said the insurer needed to adjust its rates to account for the “increasing costs associated with covering the risks faced by customers” in Texas. That includes tornadoes and hailstorms. 
“The costs associated with paying for losses resulting from fires and water damage have also kept growing,” he said.
Deeia Beck, the Texas Public Insurance Counsel reportedly argued that the raising rates are driven by profit margins,    
She said State Farm’s new rates were excessive and based on projections that “exaggerate future expected losses.” Further, the company is citing unreasonably high expenses to justify its new rates, she said.
Farmers, meanwhile, is trying to reap a “greatly excessive” profit in Texas, she said. That includes substantial profit generated from management contracts between Farmers’ holding company and its subsidiaries. 
To the extent primary insurers are able to pass perceived increases in risk onto reinsurers at a low cost, charging the policyholder for the cost of additional risk while the actual cost of managing the risk may not have changed because of the substantial decrease in reinsurance pricing would seem like a means of creating additional profit as Beck suggests.  

Here, the advantage of low reinsurance pricing is had by the primary insurer.

Though, the geophysical risk hasn't changed, pricing of the risk has changed quite a bit due to reinsurers market conditions.  Which again highlights that pricing catastrophic weather risk likely has more to do with market perceptions than scientific measures of the hazard.

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