Insurers poised to raise prices after costly string of natural disasters | Hacker News Reader

Insurers poised to raise prices after costly string of natural disasters

wsj.com

19 pointskimsk1128 comments

I've always wondered this about insurance company's business model. How is it fair or legal for them to pass on the increased costs to their customers? Providing insurance is a risk that companies take, for which they get rewarded if there is more inflow of cash (premium) vs outflow (payouts). If they have a bad year where more customers are to be paid out, then how can they increase the premium on everyone, just to ensure that their profits grow or remain same?

Insurance policies are almost always over some term (even when you pay monthly, it's usually just installment payments on a total premium for a fixed term). During the term the insurance company takes the risk that they have a bad year and pay out more than they take in. But nothing in the policies precludes them from raising the premium the next year when it comes time to renew.

They cannot change the terms of existing insurance contracts. The increased prices will show up on new contracts - either renewal or entirely new properties.

That said, as the article notes:

> There is some skepticism that reinsurance prices can rise enough in the coming year to offset the decline over the last decade. Any changes may also take some time to flow through the industry. In Florida, one state tested by this year’s events, many insurers won’t renew their reinsurance policies until June.

http://archive.is/S4qHs

aren't insurance rates supposed to be based on risk? so unless the recent string of natural disasters increased the risk (or revealed increased risk) of future disasters, they shouldn't raise rates. or did the reinsurers want to recoup some of that lost money?

Disasters essentially provide information that lets insurers price risk. Inflation is their chief enemy. During times without events they do bank for payout. When an event happens often risk is better understood and policies might be renegotiated after a disaster a la Katrina on offshore oil and gas. It happens through groups of "syndicates" at Loyds of London - basically actuaries with capital.

if disasters provide information about risk, then the lack of disasters should also provide information. which means that insurance premiums should be steadily decreasing in years where there aren't many payouts. does this happen in practice? feels like insurance premiums only ratchet up (at least on a personal level).

It doesn't really at least not for my house, haha! I think it might be related to inflation so that in real terms it really does fall.

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