Explore how reinsurance companies – and policyholders – must evolve in the face of climate change.

Climate change continues to cast a heavy shadow on the global insurance industry. Massive payouts and shifting policy commitments have led to increased premiums, and some insurers have completely withdrawn from areas currently or projected to be at high risk from natural disasters.

With such overexposure to global climate change, how can insurers mitigate the impact of the huge financial outlays often associated with these risks? Reinsurance is one solution. But how does it work to provide the insured with cost-effective peace of mind? 

Read on to learn the role of reinsurance companies and how their strategies can help safeguard you and your assets, regardless of what Mother Nature throws your way.

Key Takeaways:

  • Learn how reinsurance companies are adapting to the growing threat of natural disasters
  • Understand the importance of mitigating risks through effective reinsurance strategies
  • Get practical tips to ensure you’re adequately covered in the face of environmental challenges

The rising threat of natural disasters

Climate change and the preservation of our planet have been hotly debated on the global stage since the UN Scientific Conference of 1972. Today, the discussion continues as more homes and personal property are at risk than ever before, thanks to more floods, wildfires, and hurricanes making an unwelcome appearance.

Flood damage is no longer the sole concern of those in or near coastal areas, and wildfires are no longer contained within typical risk zones as more significant and frequent hurricane-force winds carry blazes farther afield.

It gets worse for many policyholders and insurance providers as climate change creates more natural disasters. 2023 was a record-setting year for both natural catastrophes and the sums of money that global insurers paid out to devastated policyholders in their wake.

This is where reinsurance comes in, a key risk management tool that provides both insurance companies and their customers with peace of mind. 

Let’s take a closer look at how it works.

Understanding reinsurance

In simple terms, reinsurance lets insurance companies insure themselves. A reinsurance policy purchased by an insurance company alleviates some of the risk faced by that insurance company’s customers and pays out certain amounts on a policy-by-policy basis. 

It helps protect insurance companies from going bankrupt due to significant losses from large claims like those often requested from policyholders affected by natural disasters. This not only protects insurance companies from bankruptcy but also allows them to expand the number of policies they can offer and the number of customers they can serve.

Reinsurance’s response to climate change

Reinsurers are responding to climate change by updating their strategies accordingly. Facultative reinsurance, where reinsurance companies can choose to handle risk on an individual customer or policy basis rather than a portfolio of policies, is one such strategy. In other words, facultative insurance mitigates insurance company risk with selective coverage and customized terms.

Facultative reinsurance can be offered to insurers on an “excess of loss” basis, where the insurer is only required to pay out a certain amount of catastrophe damage claims. The reinsurer then steps in to pay the remainder, or at least an agreed-upon amount up to a certain limit.

Catastrophe excess reinsurance also exists to help insurers handle large claims caused by natural disasters. This type of coverage may not have an upper limit on what the reinsurer will pay beyond the insurance company’s cut-off point. 

How this affects you

The strong, supportive role of reinsurance allows insurers to underwrite more policies and provide more accurate insurance quotes, which is good news for customers looking for coverage against natural disasters. 

It’s, therefore, essential for current and new policyholders to check and update their insurance to cover themselves against climate risks. 

Some important considerations for doing so include:

  • Flood insurance: Too many find out too late that flood protection wasn’t part of their home or renter’s coverage. It’s available separately in communities affiliated with the National Flood Insurance Program (NFIP) via your insurance agent or alternatively via FAIR plans (although these cost more and cover less).
  • Reviewing home insurance: Climate threats are always changing, affecting the safety of your home and possessions as a result. Study your home insurance policy to know exactly what it covers and, if necessary, adjust your policy accordingly.
  • Windstorm insurance: This may already be included in your home insurance policy, but it’s always best to check if it requires a separate addition via a rider. These policies offer protection against damage caused by hurricanes, tornadoes, gales, and hail.

You should also consider earthquake insurance, depending on your location. While earthquakes aren’t as common as floods, fires, or hurricanes, they’re also on the increase as a direct result of global warming

We recommend reading our earlier blog on defending your home against natural disasters for further information on relevant policies, their financial limitations, and how even a 1% chance of flooding means you’re in a “risk” area.

Remember: There’s a big difference between having disaster coverage and having enough of it! Checking to make sure you have sufficient coverage will help you significantly repair or even rebuild your home and/or replace high-value items should you find yourself impacted by a natural disaster.

Staying secure in an uncertain world

Reinsurance as a buffer for financially stressed coverage providers can be reassuring for policyholders. However, it shouldn’t be their only source of comfort: Climate change makes proactive property planning a necessity.

Natural disasters can do added damage wherever there’s a weakness in your home’s structure, so look into addressing any vulnerabilities to alleviate potential damage accordingly. Storm shutters and impact-resistant windows and doors are suitable investments against windborne debris. Trimming or cutting down any trees close to your property may also be a good idea.

Policyholders who combine proactive homecare with disaster-focused personal coverage stand the best chance of weathering Mother Nature’s worst. Additionally, they’ll be doing their part to ease the financial stresses on insurers and reinsurers. It’s a win-win for everyone.

Put a strong strategy in place with NICRIS

Take the time today to make tomorrow more secure. Our expert team is here to empower you with the knowledge, advice, and coverage you need to protect your interests.

Whether it’s home or renter’s, car or motorcycle, we can help you find the right policy to protect your property from natural disasters through a free and personalized insurance review

You can also send us a message or get an instant insurance quote!