Reinsurance is a term that Floridians may hear or read about when they are shopping for homeowners insurance.
Q. What is reinsurance?
Simply put, reinsurance is insurance for insurance companies.
Just as homeowners buy insurance to protect their homes, insurance companies buy reinsurance to protect themselves against large or unexpected losses.
Q. How does reinsurance work?
Reinsurance helps insurance companies manage risk by limiting large financial losses. This includes losses from a single major event, like a hurricane (severity), or from many claims occurring at once (frequency).
In exchange for a premium, an insurance company transfers part—or sometimes most—of this risk to a reinsurance company. This allows insurers to remain financially stable and able to pay claims, even after catastrophic events.
Q. Why is reinsurance important?
Without reinsurance, insurance companies would have to rely solely on their own financial reserves (known as surplus) to pay claims when losses exceed the premiums collected.
Surplus exists to protect policyholders and prevent insolvency. To maintain and grow surplus, insurers depend on underwriting profits (premiums minus claims and expenses) and investment income.
Reinsurance provides an essential safety net. Without it, insurance companies would need to write far fewer policies to limit risk, which would reduce competition and ultimately lead to higher premiums for homeowners.
Q. Why are reinsurers willing to take on this risk—and how can they offer reasonable pricing?
Reinsurers operate globally and spread risk across many different types of events and geographic regions. Their portfolios may include exposure to hurricanes in Florida, earthquakes in California, typhoons in Japan, aviation incidents, oil spills, and other rare but significant events.
Because it is highly unlikely that multiple catastrophic events of different types will occur in the same year, reinsurers can balance risk across their portfolios. This diversification allows them to absorb losses and offer pricing that is reasonable for insurance companies that focus on a narrower set of risks, such as Florida homeowners insurance.
Q. Is reinsurance expensive?
Reinsurance is a major expense that insurance companies must consider when developing premium rates.
Florida represents one of the largest hurricane-risk markets in the world, so reinsurers typically charge more for this exposure than for most other natural disaster risks. Insurers may reduce reinsurance costs by diversifying their policies across different regions, but companies with more geographically concentrated risk generally face higher reinsurance costs.
Q. How much reinsurance should an insurance company buy?
The amount of reinsurance an insurer buys depends on several factors, including its financial strength, the number of policies in force, and its risk tolerance.
Independent rating agencies such as AM Best, Demotech, and Standard & Poor’s establish minimum reinsurance requirements for insurers to maintain acceptable financial ratings. Insurers also use advanced computer modeling to estimate their probable maximum loss (PML) from events like hurricanes.
These models help determine how much risk an insurer retains and how much is transferred through reinsurance. The Florida Office of Insurance Regulation (OIR) reviews each insurer’s reinsurance program and PMLs annually to ensure the company remains solvent after a major hurricane and that rates are appropriately structured.
Q. Does Tower Hill purchase reinsurance?
Yes. Tower Hill purchases a substantial amount of reinsurance to protect our policyholders and ensure long-term financial stability.
This reinsurance allows Tower Hill to withstand severe events, such as a major hurricane with a low probability of occurrence or multiple hurricanes making landfall in the same year. It also enables us to insure a wide range of homes, from single-family residences to condominiums and manufactured homes, with values ranging from $50,000 to $5 million.
The vast majority of our hurricane risk is transferred to highly capitalized reinsurers around the world. With more than five decades of experience purchasing reinsurance, Tower Hill benefits from long-standing relationships in the global reinsurance market and a competitively priced program designed to protect our policyholders when it matters most.