Sometimes, even insurance companies themselves need insurance
Think about your doctor, dentist, or massage therapist– just because they know how to treat illnesses, fix teeth, or give a massage doesn’t mean they don’t visit their own doctors, dentists, and massage therapists when they need help with a problem. (Giving yourself a massage just isn’t the same.) The same can be said of insurance companies– as even they need insurance. Insurance that insurers buy to reduce risk is referred to as reinsurance– and it usually only covers a portion of certain policies that the insurance company holds. The rest of the risk is still held by the insurance company– that’s it’s job, after all. Here’s how reinsurance can help your insurance company keep you safe.
Why insurance companies purchase reinsurance
As we already mentioned, most reinsurance companies purchase reinsurance on their insurance policies to reduce risk— but they may also be seeking other, more specific benefits. Many reinsurance policies are taken out to avoid the chance that a natural disaster or other ‘Act of God’ results in so much damage (and so many insurance payouts) that it causes the insurance firm to undergo significant financial strain or even to become bankrupt. For example, a company offering homeowner’s insurance in a hurricane zone (like South Florida) may have the cash to easily pay for the damages on a few hundred homes– but if a serious hurricane hits, it simply might not have the capital to pay for serious damage on tens or even hundreds of thousands of homes.
Firms like this one often turn to reinsurance to partially reinsure part or all of their policies. Sometimes they ask the insurer to partially reinsure a series of policies that are especially high risk or somehow over concentrated in one area, such as the homeowner’s policies of the residents in a particularly serious flooding zone. It can be devastating when, after a natural disaster, an insurance company has trouble paying (or simply can’t pay) hundreds or thousands of their clients due to taking on too much risk. While the federal or state government often steps in, it’s often not enough to reimburse many clients for their true costs– and that can hurt customers and their families.
Despite the risks of insuring homes and other belongings for natural disasters, the chance of an insurance company bankruptcy occurring is significantly less when a pool of high-risk assets is held jointly by multiple insurance companies to soften the financial blow when disaster strikes. Instead of going broke, a consortium of two or three insurance companies sharing risk is far more likely to weather the financial storm, give full and fair payouts to their clients, and live to fight (and work) another day– even if they must sell significant assets in the process.
Other reasons why reinsurance can help insurance companies (and you)
Often, smaller insurance agencies can give more personalized service to their clients, but it can be hard if you don’t have a proper rating and premium. By getting reinsurance, newer or smaller insurance companies may be able to reinforce their professional credibility and assure others that they won’t be responsible for 100% of the risk on their policies. New insurance firms may not be able to get a rating unless they are reinsured. And, if an established insurance agency is moving into a new type of insurance, they might purchase partial reinsurance on those policies to get the expertise and guidance of a more experienced agency.
All this provides your insurer with more information about their policies and more ways to reduce their risk across the board– and that’s a good thing. The less risk an insurance company takes on, and the better they manage their existing risk, the less likely they’ll ever have trouble paying out a settlement or reimbursing you for other costs. In other words, the stronger your insurance company is financially, the less you have to worry about, and using reinsurance to make an insurance company less vulnerable to risk is one of the best ways to skyrocket the firm’s financial stability. Bottom line: reinsurance helps insurance companies help you.
To learn more about how to save money and reduce your risk with insurance, contact the experts at Avante Insurance today for a free consultation.