Reinsurance and How Global Catastrophic Events Affect You?

You may be hearing the term “reinsurance” more these days as the U.S. insurance market continues to struggle. So, what is “reinsurance”, and how does this affect you?

Let’s first simplify insurance: I like to think of insurance as a set of pots. Say 1,000 people put $1,000 into a “home insurance pot” each year. That pot now has $1MM. Take out $250,000 for cost of overhead/fixed costs (salaries for adjusters, CSRs, agents, software, building, etc…) and that pot now has $750,000. Say three homeowners have fires, each totaling $200,000. There is enough money in the pot to payout each homeowner and all is well. Let’s change that scenario to a tornado hits and totals out 10 homes at $200,000 each for a total loss of $2MM. There is no longer enough money in the pot to cover this and pay each homeowner that was promised coverage. Que reinsurance!

Reinsurance is essentially insurance for insurance companies. Think of it as an alternative or back up pot of money. When an insurer wants to mitigate its risk exposure or ensure it can pay out large claims, it transfers a portion of its policies and liabilities to a reinsurance company. This process helps the primary insurer manage its financial stability and protect against catastrophic losses. Remember, insurance’s primary function is to spread risk so people can continue on with life as it was with little financial impact after a catastrophic event.  

Reinsurance is part of the global economy with the top companies utilized by U.S. Insurers being based out of Europe. Catastrophic events in other countries, such as the 2022 earthquakes in Turkey and Syria, cost the reinsurance industry billions each year. As part of the global economy, insureds across the world are responsible for refilling these pots. Your insurer may be putting a portion of their pot into this back up pot, along with thousands of other insurers across the world. So, while all might be calm on the home front, these global events can cause your insurance rates to increase.

This an overly simplified example and reinsurance is used in many ways to help spread risk and increase availability of products across markets. In essence, it is a complex yet vital component of the insurance landscape, promoting stability and resilience in the sector.  

Please reach out to us at service@curains.com for any questions regarding reinsurance.