Swiss Re sees industry claims for natural catastrophes increasing

Swiss Re said it estimates that in 2007 claims for the industry from natural catastrophes will amount to roughly 35 bln usd, well above a benign 2006 which saw claims of 12 bln usd.

The higher claims scenario for 2007 underlines the long-term trend towards higher natural catastrophe claims.

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How Berkshire Built a Super-Cat Powerhouse

As of 2006, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) wrote the third-largest amount of net premiums in the reinsurance industry -- an amazing feat for a firm that started out making textiles. One of the key foundations of Berkshire's reinsurance business is its super-catastrophe line, and the company's annual shareholder letters offer an incredibly valuable case study of that segment's success. Let's take a closer look at the integral components of Berkshire's reinsurance division.

Berkshire's success in super-cat reinsurance, which insures very large catastrophic loss events, becomes more impressive in light of the challenges it faced. Capable reinsurers such as RenaissanceRe (NYSE: RNR), XL Capital (NYSE: XL), and Montpelier Re (NYSE: MRH) compete fiercely for market share. In addition, barriers to entry are minimal, with recently formed reinsurers such as Flagstone Re (NYSE: FSR) and Greenlight Re (Nasdaq: GLRE) almost constantly emerging. Lastly, reinsurance is a commodity to some extent.

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In Nature’s Casino

It was Aug. 24, 2005, and New Orleans was still charming. Tropical Depression 12 was spinning from the Bahamas toward Florida, but the chances of an American city’s being destroyed by nature were remote, even for one below sea level. An entire industry of weather bookies — scientists who calculate the likelihood of various natural disasters — had in effect set the odds: a storm that destroys $70 billion of insured property should strike the United States only once every 100 years. New Orleanians had made an art form of ignoring threats far more likely than this; indeed, their carelessness was a big reason they were supposedly more charming than other Americans. And it was true: New Orleanians found pleasure even in oblivion. But in their blindness to certain threats, they could not have been more typically American. From Miami to San Francisco, the nation’s priciest real estate now faced beaches and straddled fault lines; its most vibrant cities occupied its most hazardous land. If, after World War II, you had set out to redistribute wealth to maximize the sums that might be lost to nature, you couldn’t have done much better than Americans had done. And virtually no one — not even the weather bookies — fully understood the true odds.

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Understanding Reinsurance

Reinsurance is insurance for insurance companies. It’s a way of transferring or “ceding” some of the financial risk insurance companies assume in insuring cars, homes and businesses to another insurance company, the reinsurer. Reinsurance, a highly complex global business, accounts for about 7 percent of the U.S. property/casualty insurance industry premiums.

The reinsurance business is evolving, following the trend in the financial services in general as the various components of the business broaden and converge. Traditionally, reinsurance transactions were between two insurance entities: the primary insurer that sold the original insurance policies and the reinsurer. Most still are. Primary insurers and reinsurers can share both the premiums and losses or reinsurers may assume the primary company’s losses above a certain dollar limit in return for a fee.

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