Resources & Insights

Nested Protections: Decoding the Dynamics Behind Insurance and Reinsurance

January 30, 2024

Paul Plaksin
Executive Vice President, CCIG

Who Insures the Insurance Carriers?

In the intricate world of financial risk management, insurance and reinsurance companies play a pivotal role in safeguarding individuals and businesses against unexpected challenges. While the reinsurance market had a recent reprieve with January 1 renewals (more on that later), the property catastrophe reinsurance landscape is still finding its equilibrium.

I like to use the visual of Russian nesting dolls to unpack how reinsurance functions and what it means for your policies.

The Outer Layer: Insurance Carrier

When you purchase insurance, it’s typically from a primary insurance carrier like State Farm or Travelers. This well-known, outer layer is the one policyholders are familiar with, but inside are several more interconnected layers.

Insurance carriers are the first line of defense. These companies provide policies to individuals and businesses, offering protection against various uncertainties such as accidents, natural disasters, and health issues.

But what happens if the insurance carrier is hit with a catastrophic event (like a hurricane or wildfire) and has to pay out millions to policyholders? That’s where a reinsurance policy comes in.

The Inner Layers: Reinsurance Policies

Just like the insurance carrier charges you a premium for protection, insurance carriers pay premiums on reinsurance policies, which they use to mitigate the risk of significant losses.

When catastrophic events occur, many insurance carriers have to file a claim on their reinsurance policies to fulfill payment to their primary policyholders, i.e., pay homeowners to rebuild homes after a hurricane.

The Core: Reinsurance Companies

The smallest central doll represents reinsurance companies that assume the risk from insurance carriers. Just because they take on risk doesn’t mean they are immune from it – reinsurance companies lose money when major disasters hit, and they have to charge more to carriers in the future to recoup these losses. As you can guess, policyholders eventually feel the pain of those price increases.

You’ve probably seen stories in the news about the insurance rollercoaster over the last several years. That’s because of the financial ripple effect of many catastrophic losses that occurred from 2018-2023.

How All the Pieces Fit Together

Unfortunately, when you pay a premium to an insurance carrier, it’s more than how much of your risk the carrier is willing to take on. It’s how much risk is in their portfolio. When premiums go up, it’s often because of overall market risk and not a single client’s actions.

The July 2023 renewals saw U.S. property catastrophe reinsurance rates increase by as much as 50 percent. But it’s not all doom and gloom – January 2024 renewals brought stabilized prices, more favorable terms, and a return to balance in supply and demand.

This quick shift in the market emphasizes why it’s vital for individuals and businesses to work with insurance brokers who offer creative solutions to tackle a nuanced insurance environment.

Just as each layer of a Russian nesting doll contributes to the overall structure and resilience, we actively work to uncover new solutions and opportunities for your program. Whether we help you create a strong risk management profile to present to insurers, evaluate group captive programs, or use forward-thinking solutions to create a bespoke program for you, our team is motivated by the opportunity to embrace new possibilities.

This article is part of CCIG’s First Quarter 2024 Curious Corner: Insurance Market Insights newsletter.


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