A little-known part of the insurance industry is driving up homeowners’ premiums, consumer advocates warn.
The cost of reinsurance has soared in recent years, and now the higher prices are trickling down to everyday Americans, making their coverage increasingly unaffordable.
Reinsurance is actually the insurance that insurers take out. It transfers some of the risk so that no company is overexposed to potential catastrophe.
But as climate change poses an increased risk of property loss in the U.S., this secretive part of the product is getting a lot of attention, says Douglas Heller, director of insurance at the Consumer Federation of America.
“I have been doing insurance consumer advocacy for 25 years and in that time I have never seen as much attention to the pain consumers are feeling in the insurance market as I am now,” Heller told DailyMail.com.
Climate change increases risk of property loss in the US (Photo: Destruction left in the wake of Hurricane Ian in Florida in 2022)
“The reinsurance market has been unrelenting in its pricing over the past seven years,” Heller explains.
‘It is an understatement to say that it trickles down into our policy. It permeates our policy.
“Because in most states, a large portion, if not all, of those reinsurance costs go directly into the premiums that consumers pay.”
Climate change, he explained, has increased the risk of loss.
Earlier this week, Governor Ron DeSantis declared a state of emergency in five Florida counties after dangerous rainfall lashed the state.
So insurance companies want more reinsurance to fill that growing exposure, but the market of reinsurance sellers is not growing in terms of available capital.
This creates a seller’s market.
“So that gives those reinsurance companies an opportunity to go around the world and find the highest price relative to the risk they’re willing to take,” Heller said.
According to a report Published this month by AM Best, the world’s largest credit rating agency specializing in the insurance sector, the reinsurance market had a global return on equity of 22.5 percent in 2023.
Return on equity effectively measures profitability.
“This return on equity is dramatically higher than the average over the past six years, which was around 8 percent,” Heller said.
“That’s what happens when you have a seller’s market. And it’s not a battle between one group of companies and another group of companies.
“It’s a battle between businesses and consumers that is mediated through the insurance companies that sell us our policies, but paid for on the backs of homeowners and businesses struggling to afford coverage.”
For example, the Zurich-based company Swiss Re, one of the largest reinsurance companies in the world, reported a net income of $552 million from property and casualty reinsurance alone in the first quarter of 2024.
Bermuda-based insurance and reinsurance provider Everest Re, meanwhile, reported net profit of $733 million for the first quarter of this year.
“The reinsurance market has been unrelenting in its pricing over the past seven years,” explains Douglas Heller
Some Americans are being forced to opt for limited policies that do not provide fire or flood coverage.
Others have to buy an expensive policy from an insurer of last resort in their state, or simply move to another state in hopes of finding cheaper deals.
Others choose to drop home insurance altogether, putting themselves at risk of significant losses.
And most are seeing their premiums rise.
Grim forecasts published earlier this year predicted that the typical annual home insurance premium for the US as a whole will rise to $2,522 by the end of 2024.
According to the insurance comparison platform, this is 6 percent more than in 2023 To ensure.
But countries in higher-risk states face much steeper prices.
Florida homeowners are already paying the highest premiums for coverage in the U.S., averaging $10,996 per year by 2023.
And according to Insurify’s projections, that will rise another 7 percent this year, pushing the typical premium in the state to as much as $11,759.
“When you think of weather disasters and high insurance rates, you naturally think of the coast and hurricanes in states like Florida,” says Christopher Schafer, home insurance editor at Insurify.
“But what we’re also seeing now is that the reinsurance market is becoming much more volatile in other parts of the country, which you wouldn’t expect – in places like the Midwest.”
He explained that many storms do not meet the reinsurance threshold for insurers, and reinsurers have changed their policies. This means that insurance companies are being asked to absorb additional losses.
“This is a bad situation all around. And reinsurers are using their influence to ensure they make the best of a bad situation and avoid catastrophic losses,” Schafer told DailyMail.com.
According to predictions from insurance comparison platform Insurify, the typical annual premium will rise to $2,522 by the end of 2024
The reinsurance market is becoming more volatile in parts of the country you wouldn’t expect, says Christopher Schafer, home insurance editor at Insurify
Is there anyone who opposes these price increases?
Earlier this year, California Congressman Adam Schiff introduced a bill that would create a federal reinsurance program to help stabilize the market and insulate consumers.
“There have certainly been some attempts to get the conversation going and hopefully get some reforms and legislation passed,” Heller said.
“I don’t think this is the time to say the markets go up and down,” he added. “This is a moment when policymakers, regulators and the industry need to take action, and that requires some changes in the way this business operates.
‘People’s lives are at stake. We demand that people buy the product. And so there is a special obligation to ensure that prices are fair and that coverage is available.”
He pointed out that while the government acted quickly and shared terrorism insurance losses in the aftermath of September 11, it has still not intervened during the current crisis.
Consumers can also do their part to help minimize pain, he said.
The best thing Americans can do is shop around for a better offer.
The industry has long trusted that insurance is complicated. They know most of us don’t switch, he said, and if you do, it could save you hundreds of dollars.
Be aware of what you’re getting into with any policy he warned, because companies sell policies with lower quality coverage.
“We see in places where it’s harder to find insurance, like in Florida for example, companies selling policies called surplus lines, or excess and surplus. But they are not regulated by the states,” he added.
“If homeowners are buying policies for the most important asset they own, and they’re covered by the surplus line policy, that’s very, very risky.”
Insurify’s Schafer also encourages consumers to take steps that can improve their insurance rates.
These include improving your credit score or repairing or replacing damaged or outdated features in your home.