For retail agents, reinsurance may feel like someone else’s concern. And in many ways, it is – reinsurance is a risk-balancing tool carriers use in the regular course of doing business.
But in a hard market cycle, reinsurance rates have a compounding effect on carrier profitability and can ultimately increase the end customer’s premiums. Understanding the dynamics of reinsurance and how it drives insurance pricing is an important part of an agent’s toolbox, especially for those serving commercial clients with larger risks.
The basics of reinsurance
Insurance companies use the reinsurance market to balance their risk and mitigate the potential impact of unusually large claims or spikes in claims activity arising from catastrophic events. Reinsurers receive a premium for assuming these risks on behalf of primary insurers.
Though often referred to as “insurance for insurers,” reinsurance does not resemble a retail insurance product. Insurance companies secure the coverage through third-party brokers or direct negotiations with reinsurers to secure contracts addressing their specific needs – meaning negotiation influences reinsurance pricing as much as the actual underlying risk.
Regulatory oversight for reinsurance differs from oversight for retail insurance. While some states consider reinsurance a regulated product, they do not regulate it directly. Reinsurers do have to meet certain financial requirements and capital standards to conduct business in the United States, but they do not have to obtain regulatory approval for rates or products like the primary insurers that sell directly to consumers do.
The stakes of reinsurance
Reinsurance supports the stability and growth of insurance companies in various ways. By transferring financial liability for substantial risks to other parties, carriers are able to issue policies with higher limits and avoid the risk of insolvency following catastrophic events.
At the same time, limiting liability reduces the amount of capital carriers must keep on hand to comply with regulatory requirements, which gives insurance companies the freedom to write more policies or invest capital elsewhere. If a carrier finds a reinsurer that will rate a certain risk for a lower premium, it can transfer that risk to the reinsurer and realize a profit.
Reinsurers benefit from the arrangement by underwriting risks more effectively, whether through more precise risk modeling or by managing risk at a global scale, which helps insulate them from events primarily affecting national markets. Many large insurance companies, including Liberty Mutual, also sell reinsurance – which makes sense, as they often see opportunities to price certain risks more competitively than other carriers.
Want to learn about more industry trends and how they impact agents? Explore our Trends to Watch series.
How reinsurance impacts policy pricing
With reinsurance playing such an important role in how carriers manage risk, what customers end up paying for coverage largely depends on what happens during annual reinsurance renewal cycles, which generally take place at the beginning of the year.
Prior to 2023, the market had been favorable to insurance companies for more than a decade, with perennial inflows of new capital looking for what had long been attractive returns. Given the competition for reinsurance returns, carriers were able to negotiate attractive terms for coverage.
All that changed leading up to 2023. The perfect storm of a global pandemic paired with weather-related disasters, supply chain shortages, persistent inflation, legal system abuse and escalating geopolitical risk started to cut deeply into reinsurer returns.
This drove a seismic shift in the market’s supply-demand dynamic that came to a head in the January 2023 renewal cycle. As retail insurers sought more protection from devastating losses, much of the invested capital reinsurers use to guarantee contracts began moving to safer markets with better returns. What had for years been a buyers’ market quickly became a sellers’ market.
With less capacity and a new emphasis on improving returns, reinsurer appetites narrowed and rates skyrocketed. Property catastrophe risk coverage was among the hardest hit sectors, which reinsurance broker Howden Re described as the “hardest property-catastrophe reinsurance market in a generation.”
Rate increases did level off somewhat in early 2024, following record returns for some of the world’s largest reinsurers in 2023. However, many of the trends that have driven recent losses for both insurance companies and reinsurers are not going away, so current reinsurance rates are unlikely to decline.
Making reinsurance a part of renewal conversations with commercial clients
The 2024 Agent-Customer Connection Study made it clear that policyholders want agents to inform them of market trends that affect their premiums and to give them a heads-up before they see any significant jump in their bills. In fact, 62% of surveyed policyholders indicated that it’s important their agents educate them on changing market dynamics.
Zach Sibrel, chief revenue officer at WalkerHughes Insurance, understands that expectation, as well as the effect reinsurance market dynamics are having on premiums.
With graphs and charts, Sibrel educates his commercial clients on how the market has changed for carriers, showing them the last five years of combined ratios and highlighting the growing loss costs from catastrophic weather and legal system abuse.
Commercial clients get it, he says. They understand that insurance coverage – whether for an individual, small business or large insurance company – is about sharing risk, and that when a perfect storm of loss trends hits, everyone feels the impact.
Nevertheless, it’s crucial that agents have those conversations with their clients early so they can prepare.
Sibrel approached one commercial client four months out from renewal with the news that, due to rising reinsurance rates and other market factors, they should expect a 40% rate increase. Shopping around to other carriers likely wouldn’t find the client a better rate.
“His response was, ‘I understand. Do your best to beat 40%,’” Sibrel recalls.
Letting him know months in advance gave the client time to adjust his pricing and partially offset the additional expense. What could have been an unpleasant surprise months later instead became an opportunity to learn and adapt, thanks to an agent’s guidance.
