Are Insurance Companies Affected by Weather?

Think of hurricane season. What happens? All summer, you hear news about storms forming out in the Atlantic. Satellites keep an eye on all of them, and models predict their paths. 

It’s all basically out in the open, public knowledge. It’s almost like you’re watching a warning before a disaster, all happening in slow-mo.

But if you were to look at the stock prices of some major home insurance companies, you’d notice something pretty odd happening. The storm’s getting stronger and stronger, and yet the insurance company’s risk exposure and underwriting assessments aren’t changing. 

You’d expect the insurance company to react to the looming risk. It’s only logical, but no. There’s no change.

The insurance company waits and waits, and it’s not until after the hurricane makes landfall that the company reacts and starts adjusting claims forecasts and policy coverage.

Doesn’t that seem backwards?

If everyone knows the risk is coming, why doesn’t the insurance industry react sooner instead of waiting until after the damage is already done?

Insurance Risks Exist Long Before Any Storm

What you need to know is that, for an insurance company, risk management is no news. Risk is built into their business model from the very start.

Here’s an example of how/why:

A major insurer knows exactly how many homeowner policies it has in Florida. They know the value of those homes and what the hurricane deductibles and coverage limits are. 

The insurance company then calculates and maps all of that, and they price it way before the hurricane season even comes. By design, insurance companies are exposed to geography/weather; that’s no secret.

You see it in their annual reports and regulatory filings; it’s not something they hide from investors. Public (U.S.) insurers even openly break down all this geographic exposure in their filings.

So basically, there’s this strange gap between what everyone seems to know and be aware of, and what the insurance company does (or better yet, doesn’t do).

Everyone knows Florida gets hurricanes; that’s not news to anyone. 

You won’t see an insurance company or its investors panicking over it; it’s just business as usual as far as they’re concerned. 

When you see the market reacting to a hurricane (or any other big weather event in general), it means that what used to be a background detail/risk has turned into a real financial hit. 

Here’s where the analysis can get interesting. 

If you’re an equity analyst working for an insurance company, you won’t just look at the information from last year’s storm because that’s way too little information. 

You’d try to refine your predictions with accurate data that could estimate a company’s potential catastrophe losses. You might try to get insights from an API for accurate weather forecasts or incorporate climate models into risk assessment in order to estimate the potential damage.

This way, you’re not limited to working only with historical data, but you readily rely on up-to-date data, and you can almost bridge that gap between the ‘known risk’ and the ‘potential’ for new damage.

What Affects Insurance Company Valuations?

If the risk isn’t news to anyone, especially not the insurance company, what is it exactly that can finally cause the valuation of an insurance company to jump or drop?

Claims Turn Forcaster Risk Into Real Financial Impact

For the investor, a hurricane is a weather event – that’s it.

A claim, on the other hand, is a financial event. 

The moment an insurance company starts receiving claim notifications, vague worry becomes a real, tangible number. If those initial estimates look bad, investors start to panic-sell.

The first big drop (usually) happens when investors realize payouts are imminent. 

Changes in Insurance Companies’ Guidance Reset Expectations

An insurance company has its own playbook, and that’s what policyholders and analysts are working off to gauge the company’s response and policy stability.

As long as the insurance company stays quiet and/or non-reactive, policyholders don’t panic as they’re under the impression everything’s fine (even though it’s not).

Think about it – you’re hearing about a massive storm that’s coming. 

Naturally, you’re thinking about your insurance policy, which might become worthless in the face of disaster. You’re on high alert, closely checking to see how the insurance company will react. But if nothing happens, you calm down.

So you scratch your head thinking that perhaps someone at the insurance company knows more than you do, or perhaps they’re confident the policy is solid. Otherwise, the policy coverage and rates would be hastily adjusted.

That’s exactly the position an insurance policy aims for – to keep its clients calm/confident. For an insurance company, mass hysteria is bad for business.

MOST people will think exactly like you.

Then, once the event is imminent, the insurance company has no other choice but to admit there’s a problem. But now it’s too late to adjust policy rates or coverage, as the financial impact has already set in, and the insurance company must address the claims.

Capital/Reinsurance Pressure Alters Insurance Financials

After a devastating event such as a wildfire or a hurricane, you won’t see people talking about the total cost.

Most people will rather focus on whether the insurance will cover the claims or not. That’s because if the damage is too severe, then the company’s policy coverage might get compromised.

That’s not the only issue. 

What’s also going to happen is that reinsurance (the insurance company’s own insurance) will be A LOT more expensive because of this, which in turn puts massive pressure on the insurance company’s ability to manage any future claims while keeping premiums stable.

Conclusion

If you ever found yourself scratching your head at how insurance companies are reacting to events that are OBVIOUS to everyone, now you know why.

The insurance market NEVER ignores anything important. Never.

When it comes to insurance, it’s one thing to know the risk exists and another to know what it’ll cost if (when) it happens.

So, to answer the original question, are insurance companies affected by the weather? – Yes, they definitely are. But the important thing to know is that they don’t react to weather events immediately. They react to the claims and the financial impact.