Reinsurance is insurance that is purchased by an insurance company from one or more other insurance companies. Essentially, this is insurance for insurers. The reinsurer supports the insurance companies you know in the background, providing financial certainty in the event of claims, and mostly when there are large volumes of claims for the same reason, i.e. a natural disaster.
When you buy an insurance policy, your insurer will assess your risk based on what you disclose and price your premium accordingly. How they price their insurance premiums is determined by what their reinsurer charges them in premium to take on your risk, plus other global events that have resulted in large volumes of claims. There are so many variables that drive this cost, but it’s mainly based on claims.
Natural disaster claims are the biggest driver for property related claims (house, car and contents). In the USA, Hurricane Katrina cost reinsurers a total of $82.39 billion USD, the highest claim for a natural disaster between 1970 and 2017. The Japan tsunami of 2011 came in at second at $38.13 billion USD. Christchurch’s earthquakes costed $19.07 billion USD to reinsurers, coming in at 11th. The difference between number one and two is eye watering!
All of these claims result in premium rises for the consumer, as reinsurers look to readjust their loss ratio by charging greater reinsurance premiums to the insurance companies that you and I know. The industry as a whole is so crucial to insurance globally that without the reinsurance industry, you wouldn’t get an insurance policy.
When it comes to personal insurance, like life insurance and income protection, premiums are calculated much the same way. However, because insurers are underwriting your health and not property, they look at you as an individual, resulting in more variables to how your premium can be calculated.
For example, if you complete an application form with and NZ based insurer and tick “no” to all health related questions, saying that you’re in perfect health, your premium is only driven by your age, your smoking status and what you do for work, which in the industry is known as “Standard Rates”. If you tick “yes” to a handful of health questions, acknowledging that you have had symptoms or treatment in relation to the condition the insurer is asking you about, your premium will be calculated with those three things (age, smoking status and employment) and also by the risk that your condition/treatment/symptoms pose on future claims.
If the insurer sees a greater risk of a claim in the future based on your disclosure than the standard rate pool of applicants, they will either exclude the condition to keep your premium “standard”, or increase the premium by a certain percentage to cover the perceived risk, known as a premium loading. Your insurer here at home will then load the premium based on what their reinsurer charges them in order to take on your risk.
Without reinsurers all insurance companies would go bust. The transferring of risk to another entity is how NZ based insurers maintain financial stability. They might not always pass on 100% of your risk to another reinsurer, it might only be 50% (how much they transfer is a whole other conversation all together…), however, no insurer will retain 100% of the risk themselves.
This is why premiums vary between insurers and why premiums increase over time. The more claims there are, the more the premium is going to rise. There are things you can do at the time of applying to help mitigate premium increases, but the truth is that the global reinsurance market will always be driven by claims, and with natural disaster claims on the rise, our premiums are also going to rise with it.