What Role does Reinsurance play In Natural Disasters?

One of the biggest reasons for major insurance payouts is natural disasters. With modern technology meteorologist and scientists can more accurately predict the timing and size of natural disasters. The insurance industry often uses CAT models to predict disasters that may happen in the future. By using this technology, we can accurately understand loss exposure. However, no matter how advanced and accurate science is there is still an environmental factor no technology can 100% predict. So how has this uncertainty affected your insurance company and your reinsurance needs?

How Natural Disasters Affect Reinsurance

Over the course of the year there can be unplanned natural disasters from tornadoes to hurricanes to earthquakes. Although there are usually seasons for these events and a closely calculated damage amount, sometimes nature has other plans. Reinsurance is one of the best options for covering the potential catastrophic damage for these events.

A significant issue in the market is the fact that storms in one area of the country will affect your reinsurance pricing as reinsurers pay losses and put pressure on their capital.    This item drives higher reinsurance costs and limits availability. 

A company can protect against natural disasters by purchasing Aggregate Excess of Loss Coverage or Catastrophic Coverage.    Agg XOL provides coverage after all claims hit a certain attachment point while CAT coverage is focused on paying claims after a single event hits your attachment point.     

Why do you need to expect natural disasters based on environmental elements?

With the hard ability to predict natural disasters, knowing the latest information on the weather characteristics can help predict your reinsurance needs for the year. Many reinsurance and insurance companies do not properly analyze environmental factors and weather characteristics that play a role in natural disasters. Some of the main causes of increased disaster exposure and insurance claims are extra hot and drought-stricken summers, massive construction along coast lines, and flat line winds known as Derechos.

About Mutual Underwriters

Mutual Underwriters is an insurance administrative services and managing general agency headquartered in Carmel, Indiana.  The company mission is to provide management expertise, product development, underwriting expertise, and strategic advice to small insurance companies, Mid-size insurance carriers, MGAs, and Program administrators.  Our objective is to help these organizations modernize and thrive.