On January 1, 2024, U.S. property catastrophe reinsurance rates rose by as much as 50%. To the average onlooker, this may seem like unimportant news; in the grand scheme of this, it’s just another of many figures going up. However, the status of reinsurance, and its price points, have a direct influence on the rates you’ll pay for your property insurance. Home insurance is just one example of a product that’s being impacted by the jump in reinsurance costs.
How exactly does reinsurance costs rising impact your home insurance? Let’s dig in.
What is reinsurance?
Suppose insurance is an agreement between the insured and the insurer. In that case, reinsurance is an agreement between an insurance company and another insurance company, wherein the latter agrees to cover the former if the former is obligated to cover a catastrophic loss beyond what their premium pool can pay out for. Reinsurers, aka insurance companies for insurance companies, are companies that sell insurance to your typical P&C or commercial insurance companies.
Insurance companies manage their own risk by buying insurance. If an area an insurance company sells home insurance to experiences a massive wildfire, they may find that their premium pool is insufficient in managing all the claim payouts. In this instance, they’ll turn to their reinsurance provider, whose contract states they’re obligated to cover the remaining losses. Having reinsurance also means that insurance companies need to have less capital on hand, which means they don’t have to charge as high of premiums and can invest excess capital elsewhere. Reinsurance also ensures insurance companies can take on more policies and business, as their risk is less overall.
How does reinsurance impact my insurance?
But, like any business in the insurance industry, reinsurance is impacted by things like climate change and inflation. The more losses there are, the more payouts there are. The more payouts there are, the more reinsurance providers are having to dig into their own pool of funds, thereby requiring more capital. They raise their rates, so insurance companies raise the rates for their insured to offset the increased expense.
The result? Higher insurance premiums. Of course, this is nuanced and the impact depends on where you live. Some areas are more exposed to losses and natural disasters than others. Florida’s reinsurance dependency has increased over the last couple of years due to frequent and severe weather-related losses, inflation, and other effects. This has caused some insurance providers to altogether exit the state, and new, high-risk providers have entered.
What are the benefits of reinsurance for policyholders?
Despite the rate increases, reinsurance isn’t a bad thing for policyholders. Quite the opposite, really. For one, it allows insurance companies to offer business in areas that they might not ordinarily consider due to the decreased risk. You may have found your preferred insurance company due to this reason.
Reinsurance also guarantees you receive your true and fair settlement following a loss, even if your insurance provider’s funds run dry. This risk is sometimes higher for smaller insurance companies. Reinsurance comes in to serve as an additional layer of protection for both yourself and your insurer. Your insurer receives the assistance it needs, and you get the compensation you’re entitled to.
Reinsurance also keeps rates down, in a sense. Because the risk is more spread between your insurance company and the reinsurer, your insurance company needs to keep less capital “on-hand” and therefore doesn’t need to charge more in premiums.
How do we find affordable home insurance amid rate increases?
Assessing your insurance needs during a hard market, like the one the insurance industry is currently faced with, is no easy task. At AHI, our agents are here to help you through these difficult times. When it seems like the cost of everything is on an endless rise, it can be overwhelming to find the right starting point! While raised rates aren’t ideal, we can still help you find a good deal.
Here’s what we might suggest:
Review your insurance needs with an agent
Your insurance needs will change year-over-year. Schedule a review with an agent and go over your insurance needs to see where adjustments may need to be made. Who knows? An agent may even be able to identify eligible discounts or highlight potential coverage gaps and vulnerabilities. They can even help you “trim the fat,” so to speak, and remove excess, unnecessary coverage.
Raise your deductible
Your deductible is your percentage of the risk your insurance company takes on, so you’ll be responsible for it when the time comes to make a claim. Roof damage worth $3,500? If your deductible is $1,000, you’ll be required to pay $1,000 towards the repairs before your insurer covers the remaining $2,500. Raising your deductible can qualify you for lower insurance premiums, but talk with an agent before choosing this option. This isn’t ideal for those who might struggle to pay the new deductible amount.
Shop around with an agent
Maybe your current insurer is no longer the best option for you. Ask an agent to help you shop around and find a better rate. You may be able to find a provider who better suits your needs, or one who offers a deal that you qualify for that overall gives you a better rate than your previous provider.
Ask about discounts
Some insurance companies will discount your home insurance if you bundle it with your auto insurance. Many will discount your auto insurance policy if you have multiple vehicles insured through the same policy. There’s plenty of other discounts out there, too. Claims-free, retiree, green home, and more. Ask your agent what discounts your insurer offers and how to qualify!
An agent is your best resource in hard times. Give us a call at 913-839-1478 or request a quote.
