Coverage in the Gulf

A reader posed this question to me a little less than a month ago:

With the financial markets providing such opportunities to transfer risk such as re-insurance and cat bonds how legitimate is it for the insurance companies to say that they must pull out of MS and LA? How much of that risk is transferred to other entities? Is it because the hedge funds and re-insurers refuse to play ball in MS and LA so the insurers are stuck? What other risk transfer mechanisms are available the insurers to spread risk to others?
Can you please do a piece on your blog that addresses how the cat risk is spread and how much remains on the insurers books? Thanks and yes I live in the Great State of Louisiana.

I didn’t write about this sooner because I was just getting started blogging, and had other goals. That said, he has a valid question. Property insurance, by its nature tends to be a high severity business. If there are enough uncorrelated property exposures, an insurer or reinsurer can write business, knowing that there might be bad years, but that nothing will kill them.

Unfortunately, the southeast coast of the US is a large part of the global property insurance market and not very diversifiable, because it would be a large percentage of the total premium for property coverages globally. Recently, the odds of disaster have been estimated higher by catastrophe modelers, and then by reinsurers and insurers. That has led insurers and reinsurers to ask for higher premiums or tighter terms. To the extent that state insurance departments will not allow for this, shortages occur.

I don’t derive any direct income from the P&C insurance industry. In general, I feel that allowing market forces to work yields the best overall result; it may take as many as three years for competition to do its work.