Those evil insurance companies are going to get it

Insurers prepare for Hurricane Sandy

If you are an insurance company, how do you prepare for the “Storm of Century” or whatever they are going to call what happens when Hurricane Sandy joins the cold front in the Ohio Valley?

Well, you can report on the superficial things, like getting teams of adjusters ready, etc., but the real impact is going to be at the end most people never think about: Their investments.

Hurricane Sandy/Frankenstorm is predicted to cost about $3 billion in insurance claims … and that is before it even hits. While a big chunk of that probably will be paid by federal flood insurance claims, still the insurance industry, coming off a really bad 2011 (remember all the tornadoes in the US and Hurricane Irene), is about to get hammered again.

Little exercise in insurance economics: Where do insurance companies come up with all that money after a “disaster” to pay for all those claims?Yes, they get a lot of their money from those premiums (fees, really) that people pay on the off chance that they might be damaged by something that is covered under the policy/contract.

However, a bigger chunk of those funds come from investments made by those insurance companies (called capital gains). Now, since we have been in a recession, those returns are not as high as they once were but, still, insurance companies have big reserves … they have too (usually, it is part of the laws that regulate them).

What you are going to see now is one of two things: A) Insurance companies are going to borrow whole heck of a lot of money against the collateral of their investments or B) insurance companies are going to have to sell a lot of those investments in order to generate the cash to pay out all those claims. (Don’t even think they are just going to crack open a piggy bank and come up with that much ready cash because there is no piggy bank)

This means, either the stock market is going to take a dip (from all that selling) or lending rates are going to go up. I may be wrong, but that is what economics tells me.

Oh, and premiums also will go up … have to restock the piggy bank, ya know.