Reinsurance

Reinsurance is insurance that insurance companies purchase for themselves. Just as an individual buys insurance to transfer the financial risk of a major loss to a carrier, insurance carriers buy reinsurance to transfer a portion of their accumulated risk to the global reinsurance market. This allows carriers to write policies beyond what their own capital base could support alone and limits their financial exposure to any single catastrophic event or geographic concentration of claims.

The reinsurance market is dominated by a small number of large global organizations that absorb vast quantities of catastrophe risk from carriers worldwide. After a major catastrophe year -- a severe hurricane season, an outbreak of large wildfires, a destructive earthquake -- reinsurance losses can be measured in tens of billions of dollars. To rebuild their capital reserves and fund capacity for the following year, reinsurers raise their rates. Carriers, now paying significantly more for their own risk transfer, pass those cost increases on to policyholders in the affected product lines and states. This is why a homeowner with no claims who lives somewhere that experienced no weather events can still see a 20 percent premium increase after a year of major catastrophe losses elsewhere.

Understanding reinsurance helps explain insurance market cycles that can otherwise seem disconnected from your personal experience. When premiums rise sharply across an entire state or product category, the driver is often reinsurance cost and loss accumulation, not anything specific to your own property or driving history. It also explains why carriers periodically reduce their geographic exposure or exit certain states or product lines entirely -- when reinsurance becomes too expensive or unavailable for a specific risk concentration, writing that business is no longer financially viable. As a consumer, knowing this context helps you understand why your agent may be telling you the market for your risk has tightened and your options are narrower than they were two years ago.