Where the Money Goes: Off-shore Reinsurance, Part 4

A Florida newspaper’s report about the reinsurance market pointed out the enormous profits made by the off-shore companies — profits that could be, but aren’t, reinvested in the state. It doesn’t look as if the trend among Florida insurance companies of relying so heavily on these reinsurers is on the downswing, either. And, apart from the companies’ lack of commitment to the state and her residents, there’s something distasteful about the way reinsurers root for catastrophes.

At their 2008 meeting, the prospect of hurricane Ike had reinsurers excited. One wag quipped, “Industry mourns passing of Gustav.” If a storm proves catastrophic, profits increase.

According to the report, the sources of the money behind these reinsurers are U.S. hedge funds, global bankers and institutional investors. They all bet on catastrophic storms, earthquakes and the occasional pandemic disease — anything that will result in millions, if not billions of dollars in insurance claims. Florida is a dream come true for these investors.

The state sits in the world’s most active hurricane zone. With $2 trillion of property right in the path of catastrophic storms, the state is the site of the unmatched insured losses — it is twice the “cat” risk of any other contender.

It’s a good investment, but prices are not influenced by risk alone. These multi-billion-dollar investors can demand pretty hefty profits, too, and if Florida’s insurance companies are desperate, they’ll pay whatever the asking price is.

The reinsurers make them an offer they can’t refuse, charging as much as five times the actual risk of loss.

More to come.

Resource: Sarasota Herald-Tribune “Property Insurers Sending Billions Overseas” 10/25/10

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