A hidden insurance market is costing American homeowners and drivers dearly.
It’s called reinsurance, and insurance companies buy this coverage to help them cover losses following catastrophic events. Yet many consumers haven’t heard of reinsurance — even if they’re indirectly paying for it.
Insurance for insurers
Climate catastrophes, rising labor and repair costs, the increased frequency of severe car accidents, and heightened state insurance regulations have all contributed to record losses for property and casualty insurers, according to Insurify’s home and car insurance reports.
And as losses have mounted, insurers have increasingly turned to reinsurance to help cover the risk.
“Reinsurance capacity has become constrained, and the cost of reinsurance has increased,” said Betsy Stella, vice president of carrier management and operations at Insurify. “As a result, reinsurance has become a bigger expense for insurance carriers. Often, that cost is passed along to the consumer as a premium rate increase.”
Reinsurance allows an insurer to transfer some or all of its policies to a reinsurance company — along with the risk of paying any claims against those policies. Sharing risk with a reinsurer helps traditional insurers comply with laws requiring them to have enough free capital on hand to cover all potential claims for the policies they write.
Additional protection in a market of rising costs
Like traditional insurers, reinsurance companies set rates based on risk, and costs stemming from increased losses pass through insurers to consumers as higher premiums.
After a 20% increase in the last two years, home insurance rates have risen 6% in 2024, according to Insurify data. Car insurance rates are soaring, too. Following a 23% increase last year, car insurance costs increased 7% in 2024. Part of these rising costs stems from reinsurers increasing their rates to better manage risk.
“Much like insurance carriers, reinsurers are faced with economic pressures, more frequent severe weather threats, and changes in risk, like changing driving behaviors,” said Stella. “Reinsurers must charge higher premiums to insurers to be profitable themselves.”
Insurers often seek reinsurance to expand the company’s policy capacity, provide catastrophe protection, spread risk, and acquire expertise, among other things, according to the National Association of Insurance Commissioners. Reinsurers also buy protection to further spread risk and limit the impact of catastrophic loss events. This process is called retrocession.
How reinsurance is dictating the insurance market
The U.S. property and casualty industry experienced more than $20 billion in underwriting losses in 2022 and 2023, Swiss Re and AM Best reported. And as insurers have suffered those losses, they’ve bought reinsurance to soften the blow.
Experts point to increasingly frequent severe weather as having the sharpest effect on reinsurance rates. A national risk assessment from the First Street Foundation found reinsurance rate increases in California directly affected the “cost of business.” Insurers face substantial losses following events like wildfires, and reinsurance rates impact companies “as they seek to secure insurance on their own possible losses through risk transfer mechanisms.”
But these market challenges are not exclusive to California.
Reinsurance rates are increasing for insurers across the nation, especially those selling policies in areas vulnerable to severe weather like hurricanes, wildfires, and hailstorms.
In January, broker Gallagher Re reported U.S. property catastrophe reinsurance rates rose by as much as 50% on renewal, largely due to losses from climate catastrophes in 2023. By July 1, reinsurance rates rose another 15%, according to Gallagher Re.
“After two years of significant rate increases, the property catastrophe reinsurance market is experiencing a moderation in pricing this year,” Mark Friedlander, director of corporate communications at the Insurance Information Institute (Triple-I), told Insurify. “The trend is being driven by a resurgence in dedicated capital in the property catastrophe reinsurance sector. According to industry analysts, capital now exceeds 2021 levels, leading to increased capacity at the top of property catastrophe reinsurance programs.”
“As a result, risk-adjusted rates have seen reductions in the higher layers,” Friedlander said. “This has led to minimal rate increases for property/casualty insurers in Atlantic and Gulf Coast states as they prepare for potential impacts of a forecasted well-above-average 2024 hurricane season.”
Inflation also affects reinsurance rates. Rising home construction and auto repair costs mean more expensive claims, exposing insurers and reinsurance companies to increased risk, according to Swiss Re.
What’s next? The reinsurance market is tempering, for now
While market volatility appears to be lessening, experts caution rates could fluctuate again.
“As economic pressures wane, the market will stabilize,” said Stella. “Product innovation will also likely contribute to better market conditions. However, as long as new and unpredictable weather patterns continue to plague the industry, some instability will persist.”
A more stable market could be good news for policyholders in the highest-risk areas, like the Florida coast. Residents there already pay up to 4.6 times more for home insurance than the national average of $2,377. Some can’t even find coverage, and Citizens Property Insurance, the state’s insurer of last resort, carries more than 1.2 million policies.
California, seeking to navigate its own insurance crisis, recently allowed insurers to begin using catastrophe modeling (or CAT modeling) in wildfire insurance rate setting. The computerized process simulates catastrophic events based on historical data, geography, and geology, allowing insurers and reinsurance companies to better estimate risk.
And as consumers and insurers reduce their risk, the hope is the risk to reinsurers may subside as well.
“Insurance buyers mainly focus on the direct insurers — the primary, excess, and umbrella carriers that provide the coverage,” attorney Larry Schiffer wrote in an International Risk Management Institute report. “Smart insurance buyers look for insurance companies with high financial ratings and long histories of standing by their insureds when losses occur.”
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