Looks like the ball has landed on the number 1. This means carriers will be able to process claims fairly and not expose customers to the more draconian policy exclusions which are inserted into policy language to be used upon mega events which involve solvency risk for the providers. Pricing should firm up and profits could be positively impacted.
Of course if the ball had landed on number 5 of the hurricane roulette table it would have been an event which would have sent many providers into BK mode. It is not the case that providers can handle a CAT 5 with the impact pattern of this storm. Even a CAT 3 would have probably resulted in BK risk for most providers who have not managed their hurricane risk by reducing policies in force in the impact zone. This should be a wake-up call for providers who have goosed profits by providing expanded coverage for shoreline customers via bundling of policies. While it makes the numbers look good for shareholdrs it places their holdings at risk for total loss---something most retiring baby boomers cannot have in their retirement days. IE this stock is too risky for retirement investors and should come at a higher rate of return considering the risk being taking by its underwriting department.
Here is the problem. Allstate and State Farm are able to pull away from the high risk coastal markets because they have a product which can be sold in less risky areas. Chubb is stuck in the high risk zone because the high end market exist in this risky area and is not as widespread in other areas of the country which hold less risk. If Chubb pulled out of the high risk HO areas the company would shrink to such a small size and its profits crash so much that it is not a real option. Instead the company sits on a high risk client base and doubles down on the risk exposure via bundling of converage to goose profits. One day the pipe will have to be paid and it will end in an ugly mess. Allstate and State Farm have pulled out of the high risk coatal HO areas because it is too risky for their company, Chubb has not pulled out because they have no place to go. Those who think Chubb is a safe investment are NOT making these decisions based upon the risk assumption models but are basing this opinion on the earning streams. When investing in an insurance company FIRST look at the risk being assumed by the underwriting department and then the return on such risk assumption. When you do this you will see Chubb assumes great risk and pays too little return for such high risk assumption. Just my conclusion but do the DD yourself to see what you come up with. Remember State Farm/Allstate did the risk vs profit analysis and concluded to pull out the market was the way to go. Infact, they ran from the shore HO market as fast as they could. Chubb remains because it is stuck there by customer base and by its reliance on non-internet sales models.
Corporate Risk Limits •Understanding Concentrated Risks should not just be tied to reinsurance purposes. −No guarantee of reinsurersolvency in the event of an industry-wide event. −No federal backstop is guaranteed. •What risks are correlated? −P&C, Life, Health, Equity Market, interest rates, etc. •What is the corporate risk tolerance in the event of a catastrophe? −Corporate management should set risk limits for combined operations and develop combined reporting. −The Hartford has set a limit for risk we will allow for certain modeled events. We will make decisions to limit sales and renewals whenwe are close to or above that limit. −The largest events are very unlikely, but are you betting the company that they will not happen? −We are vulnerable to extreme events, but generally have not developed good tools for understanding and managing this vulnerability. We need to know, if only imperfectly, our catastrophic exposure
I have a good question for those who are long here---
Why have State Farm and Allstate gutted their coastal insurance HO risk?
Don't rich people have an even greater threat to their holdings than the middle income---as the rich tend to build in the most risky areas of the country?
Doesn't bundling of coverage for rich clients in HIGH risk areas create an increased need for capital holdings for CAT events which are not accounted for in the current models used by insurance companies? IE the risk that all lines will have a flood of high dollar claims at the same time.