What is Reinsurance?
The insurance industry is currently in the news, and unfortunately, it’s not generally for positive reasons. Recently, two themes seem to be dominating headlines: certain carriers leaving the market (in whole or in part) and overall rising premiums. Although these are two very different stories, one of the factors cited for both events is reinsurance.
What is reinsurance, and why does it impact these discussions at all?
Think of reinsurance as insurance for insurance carriers. While there are many nuances involved in reinsurance that are outside the scope of this article, in simple terms, reinsurance is protection for insurance companies in the event of certain types of substantial losses. Much like an individual homeowners policy has a deductible, insurance companies have a retention limit. This means if a single covered event impacts one policy (like a total loss house fire) or multiple policies (such as a tropical storm), and the resulting claim or claims total an amount above the carrier’s retention limit, reinsurance will step in to cover the excess amount.
Similar to the homeowners policy we’re using for comparison, there’s a premium charged for reinsurance. This premium is a business expense for an insurance carrier, much like employee salaries and benefits, office supplies, and postage. Carriers must budget for reinsurance premiums just like these other items, and predicting the amount of an upcoming reinsurance renewal premium is not an exact science. In a best-case scenario, increases in reinsurance premiums are built into the carrier’s budget sufficiently enough that policyholders don’t feel major impacts. In a worst-case scenario, a drastic increase in reinsurance renewal premium leads to all or part of that increase being passed along to policyholders in the form of significantly higher rates, or leads to a carrier making a decision to leave a certain market entirely because the costs of doing business there are simply too high.
Insureds may believe that rising reinsurance rates are a direct result of poor underwriting decisions made by their own carrier, or perhaps due to higher than anticipated claims activity in the entirety of their state. However, because reinsurance operates on a global market, catastrophes that happen in other areas of our country and even throughout the world are felt here at home in the form of premium increases.
Even in this volatile reinsurance market, AFM is committed to providing North Carolinians with the coverage that they need at a fair price. Because we insure the areas in which we live and work, we aren’t going anywhere.
