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Why Are Insurance Renewals increasing? Understanding the Impact of Reinsurance

Today we are talking more about why insurance renewals continue to increase and what in the heck reinsurance is. Hi everyone, I hope to help you understand one more reason our insurance rates continue to increase at an alarming rate. So today, we are talking reinsurance.


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The Insurance Information Institute describes Reinsurance this way:

“Reinsurance is insurance for insurance companies. It’s a way of transferring some of the financial risk insurance companies assume in insuring cars, homes, and businesses to another insurance company, the reinsurer.”

When an insurance company issues an insurance policy, such as an auto insurance policy, it assumes responsibility for paying for the cost of any accidents that occur, within the parameters set out in the policy.

By law, an insurer must have sufficient capital to ensure it will be able to pay all potential future claims related to the policies it issues. (Remember this word, CAPITAL, it’s key to our conversation today.)

This requirement protects consumers but limits the amount of business an insurer can take on. However, if the insurer can reduce its responsibility, or liability, for these claims by transferring a part of the liability to another insurer, it can lower the amount of capital it must maintain to satisfy regulators that it is in good financial health and will be able to pay the claims of its policyholders.

To put that another way – if they don’t meet these capital standards, they may not be able to pay your claims.

A Basic Understanding of Reinsurance

This is a basic understanding of reinsurance, and we don’t have 6 hours to discuss the finer points of reinsurance, retrocession, intermediaries, and cedents, so let’s talk about this in some simple generalities and why it is driving insurance rates up.

So here are the basics. Let’s outline this in three parts… ok, try to keep up…

Capital Requirements for Insurance Companies

First, by law, insurance companies are required to have a predetermined amount of capital on hand to cover potential claims. Let’s use a round number like 50% of the risk they insure.

So, if an insurance company has 1 million dollars in risk, they are required to have 50% of the $1 million in reserves to cover claims if needed, or $500,000.

Reinsurance and Capital Reserves

Second, insurance companies are allowed to “Reinsure” (air quotes) the capital reserve requirement with reinsurance companies or reinsurance investors.

So, the $500,000 in capital reserves the insurance company is required to have in reserve can be reinsured with an investor like a bank or reinsurance company to cover the risk. And this is important to understand, the reinsurance investor receives a return on their investment, and the insurance company frees up capital.

Changes in 2023: Reduced Reinsurance Coverage and Increased Costs

Third, this process of reinsurance has been going on for decades, if not centuries, without too many issues until 2023. What changed in 2023? The reinsurance investors started asking for more investment return and less risk from the insurance companies.

Here is a simplified example of the change: Before 2023, the reinsurance investors would provide 50% of the capital requirement of the insurance carriers. Well, because of heavy insurance claim losses from 2019 through 2023, the reinsurance investors will now only provide 25% of the insurance reserve capital required and on top of it, they are charging double the fee for less coverage.

Impacts of Changes in the Reinsurance Market

This change in the reinsurance markets caused multiple issues:

  1. Finding New Reinsurance Investors: Insurance companies had to find new reinsurance investors, or if they could not find a new investor, they would have to find actual capital, meaning cash, for their reserves. Easier said than done.
  2. Increased Cost Structure: The cost structure for insurance companies increased because of the increased demand for return from the reinsurance investors.
  3. Reduced Capacity for New Business: Because insurance companies did not have the capital to cover the required reserves, the insurance companies had to greatly reduce their capacity for new business. This makes it very difficult for people to find insurance if they are non-renewed or their rates are not affordable.

For you insurance gurus out there, I know this is a very simplified view of how reinsurance works and not all insurance companies are experiencing the “reinsurance” issues we discussed today.

Trailstone Insurance Group’s Advantage

In fact, here at Trailstone Insurance Group, we work with more than 40 insurance companies, and many of our carriers had foreseen the issues in the reinsurance markets and planned ahead, meaning our insurance carriers are still writing new business at affordable rates.

If you have questions about reinsurance, please put them in the comments below. If you are paying too much for your insurance or your agent doesn’t understand reinsurance issues, please reach out to my team here at Trailstone Insurance Group. We will do our best to find you a better rate for your insurance.

Stay safe and claims-free.

FAQs

What is reinsurance? Reinsurance is insurance for insurance companies. It involves transferring some of the financial risk from an insurer to a reinsurer to ensure that the insurer can meet its capital requirements and pay claims.

Why are reinsurance changes affecting my insurance rates? Changes in the reinsurance market have led to higher costs for insurance companies. Reinsurance investors are demanding higher returns and taking on less risk, which increases costs for insurers and ultimately raises insurance rates.

How does reinsurance impact an insurer’s financial stability? Reinsurance allows insurers to transfer some of their risk to another company, freeing up capital and ensuring they meet regulatory requirements for financial stability. This helps insurers remain solvent and capable of paying claims.

Why did reinsurance investors change their terms in 2023? Due to heavy insurance claim losses from 2019 through 2023, reinsurance investors started demanding higher returns and taking on less risk. This shift has increased costs for insurance companies.

How can I find more affordable insurance rates? Work with an independent insurance agent like Trailstone Insurance Group. We shop around with more than 40 insurance companies to find the best coverage and pricing for your needs.

Can Trailstone Insurance Group help me understand reinsurance issues? Yes, our team is knowledgeable about reinsurance and can help you understand how it affects your insurance rates. We can also find you better rates by working with multiple insurance carriers.