Page 11 - Arkansas 811 Magazine 2020 Issue 4

the losses beyond a certain set amount – much like what we know as a “deductible” (Of course, those numbers are a lot higher than deductibles!) Not thousands, but millions of dollars.
An insurance company may pay,
say, the first $5 million, after which reinsurance takes over for the balance of the losses. And just like your homeowners’ company has rules in order to cover you... for example, must be near other homes, near a water source, etc....reinsurance companies also have “rules” which your insurance company must comply with. (Types
of policy that they can’t write, for example.)
So, yes, your insurance company (personal or business) has an insurance company that makes rules what the company can write; it also charges your insurance company a premium for this coverage.
And – nope, not done yet – reinsurance companies also have other reinsurance companies with which they share the risks (one of the operative principles of insurance in the first place – Spread the Risk) – who also make rules and charge
premiums. In this way, wildfires destroying half the homes in the west are paid for by reinsurance companies all over the world. Yes, world.
Where there are thousands and thousands of insurance companies, there are only a very few hundred reinsurance companies – and they operate worldwide.
So insurance companies that you and I know, charge us premiums in order to make us whole if anything happens, they pay reinsurance companies to make sure they can make you and me whole if something happens! But for this process, your company could run out of claims money really quick in a disaster.
So since payment for the losses are kind of spread all over the world, no one company goes bankrupt in a disaster (OK states’ Insurance Commissions are also responsible to make sure insurance companies are funded properly – but that’s a whole other story!) – the risk is spread.
Reinsurance companies charge fees – and they decide what kind of exposure they want to have. Maybe they don’t
want to write on the West Coast anymore – or on the Atlantic or Gulf Coast anymore. Then you have to get a different company to cover a company’s losses – at a higher fee. (Remember how your rates go up if you have a claim??)
And then guess what?
Insurance costs more. Rates go up. The more storms in Japan or Gulfport, the more reinsurance pays out; the more they pay out, the more they charge. Eventually it comes back to you and me. And of course, we don’t want to hear that – we’ll just go get a different insurance agent, company – whatever it takes.
Yeah, well, reinsurers – those guys
who make sure your claim is paid in
a disaster? They have upped what
they charge your company – and the company may eat part of the increase, but it passes some, if not all on to you and me. While they spread out the risk, they also spread out the costs.
And, just think about it, this is the
only way insurance can possibly work. Everyone picks up a small piece of whatever happens. It’s teamwork, in its own way.
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2020, Issue 4 Arkansas 811 Magazine • 9