Hurricanes are a devastating weather phenomenon. They flood streets, destroy buildings and interfere with our electrical grids. While people often focus on boarding up their windows and stocking up their bottled water supply, another thing to consider is insurance.
Florida’s record breaking nine year hurricane dry spell has allowed public and private insurance companies to fatten their disaster cushions. Many would take this to mean our insurance market is well prepared to handle the next spell of hurricanes. However, there are some who are not so sure.
A common practice for insurance companies is to “reinsure.” This is when an insurance company essentially purchases insurance on insurance policies it holds. Common purchasers of this reinsurance are hedge funds and other high return seeking investors.
These past nine years have witnessed an incredibly low interest rate environment, driving investors to seek risk. What this means for the insurance industry is that they’ve been able to reinsure the policies they hold very cheaply, passing off much of the risk to the purchasers of this reinsurance at what can be considered deep discounts.
When hurricanes make their way back to Florida, many are concerned of a reinsurance crisis, where these opportunistic investors will be swamped with claims they can’t pay. This would have devastating effects on Florida’s insurance market, with policy holders feeling the pain for years to come.
Additionally, many are concerned that people are being lulled into a false sense of security because the disaster funds are so healthy. Those worried suggest it wouldn’t take an impossible amount of hurricanes to deplete these funds, multiplied by the effect of reinsurance risk. While all of this is just speculation, unfortunately it will take a hurricane to determine whether we’re in trouble or not. Let’s hope we’re not!