Hurricane Milton: How the game between customers, insurers and reinsurers works

Reading time: approx. 3-4 minutes

As Hurricane Milton approaches, it is not only the people in the coastal regions of Florida who are facing a challenge, but also the insurance industry. But how exactly does the interaction between insurers and reinsurers actually work in the event of such major disasters? Who bears which risk and who earns or pays in the event of a disaster?

1. policyholders: the customers

That's us - the private individuals and companies who take out insurance policies. Whether it's household contents, buildings or life insurance, customers regularly pay premiums to protect themselves against certain risks such as natural disasters, accidents or other unforeseen events. When a hurricane like Milton strikes and the house is destroyed, the insurer steps in to cover the damage - provided it is covered by the policy.

What do customers pay?

The premiums we pay to insurance companies are based on the risk we pose. If we live in a storm-prone region, the premiums for natural catastrophe insurance increase.

2. insurers: who pays in the event of major damage?

Insurance companies collect premiums from their customers and use this money to pay for damages that occur during the year. However, natural disasters such as Hurricane Milton can swallow up huge sums that far exceed what insurance alone can cover. This is why insurance companies take out insurance policies for themselves - this is the role of reinsurers.

What do insurers pay?

After a hurricane like Milton, they have to pay the insured customers' claims. These sums can quickly run into the billions. To protect themselves from excessive losses, insurers transfer part of their risk to reinsurers.

3. reinsurers: the insurers' insurance

Reinsurers - like $SREN (-1.65%) or $MUV2 (-2.42%) - assume part of the risks of the insurance companies. Suppose an insurance company covers USD 500 million in claims but does not want to bear the full risk. It pays a premium to the reinsurer, who then assumes part of the risk. If Hurricane Milton causes major damage, the reinsurer steps in and covers part of the insurer's losses.

What do reinsurers pay?

Reinsurers pay out in the event of major disasters if the losses exceed a certain threshold. In return, they collect premiums from the insurers, just as the insurers do from their customers.

4 Why are reinsurance rates rising?

Natural disasters such as Hurricane Milton lead to huge amounts of damage. To protect themselves against future catastrophes, reinsurers often increase their prices after such events. These rate adjustments then affect the insurers, who could pass on higher costs to their customers.

This means that insurers pay more for reinsurance after major disasters, which could also mean higher premiums for customers in the long term.

A finely tuned system

The interaction between customers, insurers and reinsurers is a complex system that is designed to spread risks widely. Each participant - from the customer to the insurer to the reinsurer - bears a share of the risk so that in the event of major disasters such as Hurricane Milton, no single party has to bear the costs alone. In calm years, the industry earns from the premiums paid. But as soon as major natural events occur, as is expected with Hurricane Milton, it becomes clear how well the system really works - and who pays in the end. Ah, and by the way - whether reinsurers are needed

Happy investing! 😊

GG

Aaaaaach and by the way:

Do we even need reinsurers?

Reading time: 1 minute

Pro reinsurers:

Risk distribution: Reinsurers help to spread the risk of major losses over several shoulders. In the event of disasters such as hurricanes or earthquakes, individual insurance companies could quickly go bankrupt without reinsurers.

Financial stability: They ensure that insurance companies remain solvent even in the event of extreme losses. This creates trust among customers and stabilizes the insurance market.

Protection against major losses: Natural disasters and other major events often cause losses in the billions. Reinsurers absorb some of these costs and prevent the entire sector from coming under pressure.

Contra reinsurers:

Additional costs: The premiums that insurers pay to reinsurers are often passed on to customers. This makes insurance more expensive without the customer benefiting directly.

Dependence: Insurance companies could rely too heavily on reinsurers and have less incentive to build up their own reserves for emergencies. This could weaken the financial strength of insurance companies in the long term.

Complexity: Reinsurance systems are complicated and increase the administrative burden. This could lead to inefficiencies and higher administrative costs.

What do you think? 😉

PS: Retrocessionaires then also take some of the risks away from reinsurers. 😉