This is the second article in a series to bring awareness about the property market conditions that can impact costs associated with your insurance coverage.
Insurance is designed to protect against the financial loss associated with risk, usually in the form of a contract or policy. When something bad happens and there are damages associated with it, insurance may be used to cover those costs. Insurance companies and risk pools like the TASB Risk Management Fund take on the risk of their clients and members. However, insurance companies and risk pools can only assume so much risk. There comes a point that insurance companies and risk pools need to purchase their own insurance—this is called reinsurance.
How reinsurance works
Reinsurance is a way of transferring some of the financial risks that insurance companies and risk pools assume to another insurance company. Many people know that premiums or contributions paid to an insurance company or risk pool are used to cover claims that happen. However, a portion also goes toward purchasing reinsurance to cover losses above certain high limits. Reinsurance is an important concept because it allows insurance companies and risk pools to spread the risk. Without reinsurance, insurance companies, risk pools, and their clients or members would be vulnerable to significant losses or disasters.
The reinsurance market relies on the availability of capital or money. The greater the access to capital a reinsurance company has, the more they can issue or offer reinsurance. When there is a tightening of access to these funds, reinsurance companies are limited to extend or offer insurance coverage. Reinsurance companies make money two ways:
- By earning an underwriting profit. This means that when an insurance company insures a risk, they are underwriting and examining if this a good risk. For a reinsurance company, the ideal situation is to insure buildings with low risks and claims history, making an underwriting profit.
- By investing the money they collect in premiums, earning investment income. Insurance companies participate in the financial markets purchasing various financial instruments such as stocks and bonds.
Just like the financial markets go through up and down financial market cycles, the insurance industry goes through cycles of soft and hard markets. During a soft market, it is a buyers’ market, meaning there is increased competition which generally drives rates down. There is increased capacity or money available to write more insurance policies. In a soft market, coverage offered is usually broader and has relaxed underwriting criteria. Conversely, a hard market is a sellers’ market in which rates increase and capacity shrinks or reduced supply of funds. Usually in this environment, insurance companies implement strict underwriting standards and limit the number of policies offered.
How weather affects reinsurance rates
It is expected that property insurance premiums will rise in regions of the country where significant weather activity occurs. Since 2017, Texas has led the nation in insured catastrophe losses six of the last 10 years. Catastrophic losses are considered an event that causes $25 million or more in property losses. In addition, Texas leads the nation in hail events five out of the last six years. These conditions in Texas have made purchasing insurance challenging. The reinsurance market has responded by increasing deductibles and limiting coverage.
What to do in a hard insurance market
During a hard insurance market, reinsurance companies will implement stricter underwriting criteria because they will be limited in offering policies. With that in mind, insured organizations need to be active and strategic in addressing their risks. Specifically, for Texas, property owners will need to be aware of the condition of their buildings. With the stricter underwriting criteria, reinsurance companies will want to know the claims history, what type of roof systems are on buildings, and what maintenance program is in place.
How the Fund can help
The Fund is supported by nearly 200 staff members who specialize in risk management coverage who can help Fund members prevent and respond to claims as well as recover from catastrophic events such as storms. We also want to help you prevent damage to your property when these events do happen as much as possible. The Fund offers educational resources and training on roofs and the property market at no additional cost to Property members. This year, the Fund launched online roof maintenance training to help extend the lifecycle of their roofs and a Roof Summit to help superintendents and school business officials make the best decisions for their roofs. Contact your risk solutions consultant for more information about risk prevention services to help be prepared in the event of a storm.
TASB Risk Management Services Director of Risk Solutions Janina Flores leads a team of professionals who provide a variety of services to Fund members to help prevent losses and be aware of and prepared for emerging risks.