Miami has been hit with hurricanes and Los Angeles has endured devastating wildfires. Those are just two cities that have dealt with recent natural disasters throughout the U.S., which in addition to loss of life, have tallied billions of dollars in real estate damage.
Despite the increasing frequency of these events, insurance companies are resisting a recent push from reinsurers to raise prices for property-catastrophe damage, according to the Wall Street Journal.
Insurance companies take out contracts with reinsurers to cover losses once they hit a certain amount, which helps mitigate risk and keep rates down should a financially devastating event occur.
Now, reinsurers want insurance companies to charge higher rates in 2019 contracts, but insurers aren’t balking. They say the reinsurers have built up a vast amount of reserves to cover those potential losses, the Journal reported.
Globally, reinsurance prices have dropped by 1.2 percent on contracts that renewed on Jan. 1, although prices rose by as much as 20 percent for accounts that had experienced catastrophic losses.
Following the Woolsey and Camp fires in California, some insurance companies there have started to pull back coverage in fire-prone areas, in order to mitigate risk.
Reinsurance can be arranged through catastrophe bonds. An insurance company sends out a portion of premiums to trust companies, which raise money from investors who agree to cover losses after a certain threshold. Such bonds are common in Florida.
There is a surplus of capital in the reinsurance market because pension funds, endowments, and other capital suppliers have poured billions into reinsurance bonds. There is $300 billion worth of reinsurance premiums worldwide and about half is up for renewal.
Reinsurers were hoping that prices would rise as much as they did in 2018 — about 6 percent. Experts told the Journal the funds have enough money to cover losses even with less-than-expected increases in rates, but could be in trouble if natural disasters continue to pound insurance companies like they have in recent years. [WSJ] — Dennis Lynch