Why did prices of insurance firms not drop after the floods in the uk?
This is a really interesting phenomenon in the insurance industry. Contrary to what would be intuitive, the price of insurance firms often INCREASES after major disasters. Certainly disasters cause insurance firms to have to write checks, thus decreasing their cash position, hurting their balance sheet, and therefore, you'd expect, the stock price. Just as you'd expect, right? But a few things counter this effect. One is that insurance companies themselves often hold insurance from re-insurers against such disasters. So in many cases they're somewhat shielded from big hits like this. Additionally, one of the effects of major disasters is to suddenly convince a lot of people that they, too, now need insurance. "If it happened to them, it can happen to me" sort of attitude. And so you find that after major disasters, insurance firms suddenly are able to sell tons of new policies. The inflows from new policy sales often more than compensate for outlays to effected policy holders. And so the stock price remains just fine. |
