Insurers can weather disasters

 
Marc Sidwell
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THE losses to insurers from Hurricane Sandy are substantial, although not in the league of last year’s natural catastrophes with their appalling toll of human misery in New Zealand and Japan, floods in Thailand and Hurricane Irene in the US, all of which made 2011 the year with highest catastrophe-related economic losses in history, according to Swiss Re.

But while the impact of huge natural disasters might seem like a time to flee insurance stocks, and indeed they tend to decline in the immediate aftermath of catastrophic events, it may instead be a time to buy while prices are depressed. According to a 2008 paper by Walter Kramer and Sebastian Schich, Large-Scale Disasters and the Insurance Industry, such events do not negatively affect the sector as a whole on the medium-term in the eyes of equity investors.

Kramer and Schich’s analysis concludes that stock prices do not suffer even following disasters that were unforeseen when premiums were calculated, implying that investors believe that losses will be recouped over the foreseeable future.

Insurance exists to be a comfort when the worst happens. It seems it offers that opportunity for investors that keep faith as well.