Insurance and Re-Insurance Exposure to Natural Disasters Considered

There are insurance companies and reinsurance companies. The insurance companies are the folks that have their name on your insurance policy. They aren’t the insurance agent that sells it to you, but rather a big corporation with lots of assets, collecting money from hundreds of thousands if not millions of people, and putting it into a pool, and when one person has a calamity, accident, or situation they can pay it off without having to worry.

The rest of the money is invested in the stock market, emerging markets, and other investments and the insurance company makes lots of money on the increased value of their investments, while keeping a large percentage available in case of the onslaught of massive claims, which sometimes occur due to natural disasters, or other black Swan events.

Now then, the reinsurance companies are gigantic and enormous companies that insure all the insurance companies. You see the insurance companies don’t want to be on the hook for everything, so they take out an insurance policy with the reinsurance company that has even more massive assets. Generally what might happen is the insurance company covers the first so many millions of dollars worth of losses in the event of a natural disaster, and the reinsurance company kicks in after that. There are a few well-known reinsurance companies like Munich, and AIG.

Both of those reinsurance companies were hit extremely hard after the Japanese earthquake and Tsunami. Both recorded net losses for that quarter, and assume that it will take a bite out of their next quarter as all the claims come in and the payouts are made. In the United States perhaps you remember the Alabama tornadoes, or the big tornado that hit Joplin Missouri, or the massive floods from the Mississippi River in 2001. Yes there have been a lot of natural disaster claims and it was a tough first half of the year.

But I wouldn’t worry if I were you because these insurance companies and reinsurance companies have been doing this a long time, and they’ve collected millions and billions, if not trillions of dollars, and they’ve reinvested that money and made even more. They have massive reserves, and the ability to sell corporate bonds to get even more. They are not going out of business anytime soon, that is to say as long as we don’t have an apocalyptic or Armageddon type event. And if we did, and it was the end of the world, there’d be no one to pay out to anyway. Indeed I hope you will please consider all this and think on it.

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