However, it does not seem to take long for people, including householders, business executives and even underwriters, or at least their bosses, to assume that a positive state of affairs will continue. The take up of flood and earthquake insurance - and the pricing of such - tend to be directly correlated with the immediate past.
Prices for property reinsurance rose sharply for the southeastern United States and Mexico at renewal in 2006 following hurricanes Katrina and Rita. For insurance and reinsurance companies, 2006 looks to have been an excellent year. What is the probability that prices for reinsurance renewals from 1 January and into 2007 will fall?
Financial markets can remain buoyant for many years, so long as investor sentiment is positive. Such optimism does not seem to have any effect on the occurrence of natural events, although a positive approach rather than fatalism can reduce the impact of catastrophes on the built environment and population if channeled into effective planning.
Climate change, migration, changes in land use and construction standards are all factors that affect the level of losses insurers and reinsurers face from catastrophic events, and the industry is showing itself increasingly willing to campaign for measures that, yes, would improve its position but should also reduce the impact of catastrophes on people and economies.
Such issues are generally matters for local and central governments and, as such, are often subject to political considerations. It has been reported that the United States federal Government is making grants of up to $150,000 to cover uninsured losses for New Orleans residents to relocate or rebuild Hurricane Katrina damaged homes.
In its October 19 issue, USA Today reported that nearly three-quarters of the homeowners applying for these grants planned to rebuild their homes in flood areas, although updated city construction requirements are probably not adequate to prevent them from being flooded should the levees fail again.
An experienced commentator, Jack Gibson, president of the International Risk Management Institute, responded, "This really disturbs me. Federal and state programs nonsensically encourage or even subsidise building in flood zones and on hurricane prone coastlines. (The National Flood Insurance Program is also a subsidy since the premiums charged do not reflect the risk insured.) Then, when the insurance industry shows the wisdom to refuse to cover the risk or to charge an appropriate premium, it is criticised by politicians and the public."
The frustration is understandable. Financial market pressures have forced the insurance industry to take a more disciplined approach to its underwriting. It is also trying to improve the risks. It can do more, especially in the developing world, to help build resilience to catastrophes, as can commerce in general, but as this edition of Catastrophe Risk Management shows, it is investing in disaster mitigation in a number of ways.
Naturally, insurance and reinsurance companies will come under pressure to cut their rates if there is a lull in the number or severity of natural catastrophes for a period and the industry makes healthy profits. It does not mean they have wildly over-priced catastrophe risks. Instead, they need to find ways of sharing the benefits of the good years with their customers in ways that support what they say about the risks in the bad years.
