CNN Money/Fortune Magazine noted today that despite Super Storm Sandy’s devastation, several groups will see an uptick in business and money. One of those groups benefiting from Sandy is insurance short-sellers.
Short-sellers have been blamed in part for the financial crash in 2008. Short selling,
[I]s the practice of selling securities or other financial instruments, with the intention of subsequently repurchasing them ("covering") at a lower price. In the event of an interim price decline, the short seller will profit, since the cost of repurchase will be less than the proceeds received upon the initial (short) sale. Conversely, the short seller will incur a loss in the event that the price of a shorted instrument should rise prior to repurchase. The potential loss on a short sale is theoretically unlimited in the event of an unlimited rise in the price of the instrument, however in practice the short seller will be required to post margin or collateral to cover losses, and any inability to do so on a timely basis would cause its broker or counterparty to liquidate the position.1
But should short selling be allowed in the case of property insurance—especially after a disaster? Insurance companies are in a position of public trust. “Insurers have affirmative duties to fulfill the purposes of the coverage.” There is a “level of service the public should expect from an insurer.”2
Insurance companies like Chubb, Travelers, and Hartford made billions in profits last year,3 yet on today’s stock market, all three “open in the red.” CNN Money/Fortune noted:
Wall Street’s short sellers no doubt pounced on the companies once trading began Wednesday. Chubb, Travelers, and Hartford all opened in the red. We might never know which shorts made millions — besides being a secretive bunch, shorts probably don’t want the publicity that comes from profiting off Sandy — but they’re another slice of those hitting post-Hurricane pay dirt.4
What if short-sellers do to insurance what they did to the financial system in 2008? Given that a huge segment of the public relies on insurance companies to pay claims owed, and to pay the fair and proper amount owed, should we really allow insurance to be at risk for the same kind of crash short-sellers contributed to in 2008?
1 See http://en.wikipedia.org/wiki/Short_selling.
2 See Phelps v. State Farm Mut. Auto. Ins. Co., 680 F.3d 725, 730 (6th Cir. 2012) quoting Gary Fye.
3 http://money.cnn.com/magazines/fortune/fortune500/2011/industries/182/index.html.
4 See http://money.cnn.com/gallery/news/economy/2012/11/01/sandy-winners.fortune/index.html.
