Insurance premiums often rise in years without notable disasters and fall in years that followed them. The pattern reflects the supply of capital rather than the frequency of claims.
Insurers hold capital against future losses
An insurer must hold reserves sufficient to pay claims that have not yet occurred, sized against the worst outcomes it might plausibly face across its portfolio.
The amount of business it can write is limited by that capital. More capital supports more policies; a depleted balance sheet supports fewer.
Pricing therefore responds to how much capital the industry collectively holds relative to the risk it wants to cover, not simply to last year's claims experience.
The cycle turns on capital entering and leaving
After a period of low losses, insurers accumulate capital and compete to deploy it, which pushes premiums down and loosens the terms attached to policies.
Cheap cover attracts more business until margins thin. A large loss event then depletes capital across the sector simultaneously, and capacity contracts.
Premiums rise sharply in the aftermath, which attracts fresh capital seeking the improved returns, and the cycle begins again from the other direction.
Reinsurance transmits the change downward
Primary insurers buy cover from reinsurers to protect against concentrations of loss, and that cost is a major input into what they charge policyholders.
Reinsurance is repriced at set renewal dates, so a change in its cost passes through to consumer premiums with a lag of months rather than immediately.
Because reinsurance is global, a disaster on one continent can raise the cost of cover on another, which is why local claims experience explains only part of local pricing.
Investment income changes the arithmetic
Insurers collect premiums before paying claims and invest the difference, mostly in bonds. The return on that portfolio subsidises underwriting.
When interest rates are low, investment income shrinks and the underwriting result has to carry more of the burden, which pushes premiums up.
When rates are high, insurers can accept thinner underwriting margins and still meet return targets, which supports softer pricing.
Model revisions reset expectations abruptly
Catastrophe pricing relies on models estimating the frequency and severity of rare events. Those models are updated as new data and better science arrive.
A revision that raises expected losses in a region increases required premium immediately, regardless of whether anything has actually happened there recently.
This is why certain areas see sustained increases while claims remain low, and why an individual policyholder's own record explains less of the bill than intuition suggests.