Unwrapping this risk management tool, and how its different aspects can impact policyholders
Key takeaways:
- Learn what reinsurance is and how it affects your premiums.
- Understand why reinsurance drives up costs and what it means for you.
- Get practical tips to help you navigate rising insurance rates.
“Why are my insurance bills rising?” is a common question. There’s an increasingly widespread trend of insurance premiums creeping – and sometimes leaping – upward. For example, home insurance in 2024 is projected by some watchdogs to spike, depending on your state, between 6% and 23%!
Inflation is at play, but reinsurance is a lesser-known but key factor. Let’s explore reinsurance, how it affects insurance companies, and what it could mean for your monthly premiums.
Understanding reinsurance: the basics
Insurers seek reinsurance because unforeseen events can negatively affect them and their policyholders. The reinsurer assumes some share of financial risk taken on by the original insurer (termed the cedent), and will pay out to varying degrees on some or all of their policies. Here’s a summary of different types of reinsurance and their objectives:
Facultative reinsurance: This type usually covers bigger, riskier outcomes like natural disasters, with each individual risk requiring deep assessment and its own underwriting. Coverage is for a fixed period, rather than long-term, and can provide greater flexibility to protect against unique or emerging insurance risks.
Treaty (aka obligatory) reinsurance: This provides coverage for every policy in a given category. This coverage is automatic without the need to examine each policy individually. Arrangements tend to run long-term instead of fixed periods followed by renegotiation.
Reinsurance contributes to market stability by protecting insurers against major losses which could bankrupt them. Many insurance companies have heavily invested in the economy, so it makes sense to support them. Insurance services can also help prevent bankruptcy for individuals and businesses, which reduces the possibility of widespread negative effects on the overall economy.
The rising costs explained
Two reasons behind increasing reinsurance prices are environmental changes and global events. Consider New York. We’re increasingly at flood risk which raises the chances of more policyholders cashing in on their flood and property insurance.
Our previous blog on how climate change impacts property insurance outlines how insurance companies could lose a lot of money under such circumstances and sometimes pull out of high-risk areas altogether. A forward-looking insurer may want to get ahead of natural disasters and the ensuing claims by obtaining reinsurance to help them meet those payouts.
There are other reasons why insurance companies seek reinsurance, like expanding their business or decreasing general net liability. Sadly, inflation is constant and a primary reason for reinsurance. Inflation drives up the cost of medical treatments and goods and services, making it more costly for policyholders to meet expenses.
Since this would mean cedents paying out more on claims, they may decide to seek more reinsurance. They’re now paying more for that buffer while also being vulnerable to inflation could squeeze them harder due to reinsurers raising premiums. This creates an inevitable cycle which isn’t always beneficial for the consumer.
The impact on your wallet
Various other factors may contribute to a cedent’s need for reinsurance and potentially drive up their insurance quotes, including:
- Lower interest rates
- Crime and accident rates in a particular location
- Developing 21st-century problems like cybercrime and other new risks
- Increased operating costs set by regulatory authorities
All of these may trickle down to policyholders. Let’s consider two examples. Lower interest rates tend to dissuade new customers from taking out savings-based policies like life insurance (as opposed to higher interest rates which attract them). Fewer customers mean less insurer revenue to handle payouts. This could lead them to seek reinsurance during low-interest periods and possibly raise their existing customers’ premiums.
Cybercrime escalates yearly, leading to growing numbers of claims. This isn’t like a bad neighborhood or an accident/disaster-prone state where only policyholders living there see premiums climb. Cybercrime impacts globally, and financially affects everyone.
Reinsurance-related price hikes may affect every policy type a cedent offers or be limited to areas where the cause for reinsurance has an effect, like home and auto insurance policies if natural disasters trigger the need for reinsurance.
Conversely, it can be beneficial. Having reinsurance in place means the cedent has lowered their exposure to risk and may be able to expand operations. This can allow them to take on more customers and offer lower insurance quotes since they now have more revenue.
Practical advice for consumers
It’s crucial to understand your insurance coverage and periodically review your needs to find the best insurance quotes. Learning more about the dynamic factors behind setting insurance premiums can help make a mysterious subject less intimidating. A good place to start is with our blog on understanding your insurance rate increases.
Reinsurance doesn’t affect all insurers equally. You might find a better deal on your coverage by shopping around and choosing a provider less impacted reinsurance. It’s also a good idea to consider bundling multiple policies with the same insurer.
Lower your personal risk profile by making changes which may render you less of an insurance risk. This could involve adding crime and accident prevention measures to your home and vehicle (such as locks and fire or burglar alarms) or becoming more proactive with your health.
Personal risk management could mean lower insurance quotes, making future reinsurance-related price hikes easier to bear. Additionally, gaining deeper industry knowledge can empower better financial choices. Speak to an experienced insurer to learn more.
Take charge of your insurance costs with NICRIS
Nobody likes premium increases, but reinsurance can help the economy and means your provider takes meeting its customers’ claims seriously. We also help people feel more secure about the future by making insurance quotes transparent for everyone in New York State.
It’s knowledge you can use to make favorable financial decisions. Just click for an instant quote on car, home, renter, term life or motorcycle insurance, or send us a message with any questions.