Updates in the US insurance industry
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From the deep winter stop in Texas and deadly California wildfires to devastating hurricanes and floods, it was a year full of extreme weather conditions. Insured losses due to natural disasters worldwide reach a 10-year high of $ 42 billion in the first half of 2021, according to Aon. The second half no longer looks promising. Early estimates have linked possible insured losses from Hurricane Ida between $ 15 billion and $ 25 billion.
All of this should be bad news for property and casualty insurers. After all, they make money by collecting more premiums than they pay out in claims. You would not know it if you look at their share price performance. Shares in both Allstate and Chubb have been rising since the beginning of January by a fifth and trading near the highest highs. AIG increased 46 percent in the same period. The S&P 500 P&C Insurance Index trades at almost 15 times higher earnings than its three-year average.
However, investors have good reasons to keep the confidence in insurers, who rarely have to pay for catastrophes themselves. They buy reinsurance to cover their own exposures. This should make the impact on their earnings more manageable. Although the combined ratio of the industry – a key criterion for underwriting – must be increases from 98.7 to 99.6 this year, a reading below 100 indicates decent gains.
Instead, reinsurers will bear many of these losses. No surprise that shares of Everest Re and Renaissance, two of the largest independent groups in the U.S., have plunged to 10 percent of their value in the past month.
Primary insurers have other levers that they can pull. They can increase prices or sharpen underwriting. Some may even benefit from a greater demand for insurance as more people seek cover after a major disaster.
Meanwhile, a recovery in the US economy and slightly higher interest rates could boost insurers’ other source of income: investment income. The extra stability will be welcome after the storms of this season.
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