It’s no secret that insurers are tightening their belts, leading to cancelled policies for some and increases in premiums for other insureds. Of course, we all know that economic factors like inflation and rising interest rates are chief contributors to this hard market, but what may be lesser known is the fact that a lack of capacity in the reinsurance market is also driving rate hikes.
For those outside of insurance, it might be helpful to define reinsurance. As one might guess, reinsurance is basically insurance for insurance companies. It allows insurers to transfer part of their risk to another insurer, sometimes internationally. Reinsurance supports insurance carriers like PLM, ensuring that when a large catastrophe happens they are not left bearing all the risk.
The recent slew of costly natural catastrophic events from hurricanes and floods to wildfires, coupled with the current economic climate, has led reinsurers to pull back – with some withdrawing entirely from the catastrophe market and others raising rates to better manage the risk. But that’s not all that’s been driving rate hikes:
- What’s known as the retrocession market also dried up as investors fled for better returns to the fixed income and stock market. The retrocession market allows reinsurers to transfer their risk to yet another buyer.
- Agents and policyholders wised up about insurance to value. With inflation rising, policyholders started talking to their agents and carriers to make sure they had enough coverage to adequately manage rebuilding costs at current prices. At the same time, agents realized they might be held liable under an errors & omissions exposure if they didn’t bring this issue to their client’s attention. As a result, insurers saw a surge in the values of the properties they were insuring, which was passed along to reinsurers.
In response to these issues, many reinsurers have drawn a line in the sand. Of course, they want more premium from their carrier partners to better match with the losses they are seeing, but they are also waiting until the last minute to provide quotes to carriers and tightening terms and conditions.
So, what does all this mean for insureds? Unfortunately, the higher rates charged by reinsurers to carriers are trickling down to policyholders. While largely dependent on economic factors, insureds can better protect their business from astronomically rising rates or sudden loss of coverage due to issues in the reinsurance marketplace, by working with an insurance partner who understands reinsurance and has a strong track record of profitability that will be attractive to reinsurers. Further, carriers that maintain strong relationships with their reinsurers beyond renewal time are also in a better position to retain coverage and attractive rates.
As a specialty insurer committed to the wood niche, PLM is able to demonstrate to our reinsurers throughout the year that we understand the industry, know how to work with our clients to help them mitigate their risk, and that overall, we are good at what we do. Prices are rising on everything around us, including insurance. One of the best ways to lead your business through these challenging times is to understand your risk and work with an insurer who knows your industry and better yet, your business.
