Because of a slack demand, prices for reinsurance dropped as much as one-fourth in some markets as of midyear, according to news reports. In Florida, prices dropped about 25 percent, while in other areas of the United States, they were down about 20 percent.
The reinsurers bargained with insurance companies from around the world earlier in the year to set terms and prices for helping the companies handle big risks such as hurricanes and earthquakes.
But the demand for reinsurance has been faltering, and as a result, prices have as well. Industry officials said there does not seem to be any change on the horizon. Part of the reason for the decline in demand for reinsurance is a lower than usual number of catastrophe claims. While the drop in claims helped the reinsurers to protect their earnings, it also helped to push their prices down.
Another reason for the slump in prices is low interest rates that have remained in place since the recession. Because of the low rates, big investors such as pension funds, institutional investors and wealthy individuals have put their money in financial instruments that compete with reinsurance companies, such as catastrophe bonds.
The amount of catastrophe bonds sold in the first half of 2014 was a 50 percent increase over the same period during 2013.
These kinds of bonds cover very high risk, the kind of risk from things such as earthquakes and hurricanes. By buying the bonds, investors assume the risk, and they get a high yield on the bonds because of the risk. By buying the bonds, investors cover the damages resulting from such natural disasters.
If the cost of catastrophic reinsurance rates drops another 15 to 20 percent, they will be below 2001 levels, making it hard for reinsurers to cover the cost of capital.
Even blue-chip firms like Berkshire Hathaway are pulling out of the reinsurance market.
Other large insurers are trying to avoid being caught in a deflationary spiral, focusing on maintaining profits and expressing a willingness to forego business where the price is not high enough for the amount of risk the company is taking on.
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