Summary
Insurance capacity is the amount of risk that an insurer is willing to take on. It's important to have a good understanding of this concept because it will help you determine the best way to protect your company's bottom line.
Players
Definition
Insurance capacity is a crucial concept in the insurance industry. It refers to the maximum amount of coverage that a company or the market can provide. For instance, after significant events like 9/11, there is often a shortage of insurance capacity in the market. This means that companies are unable or unwilling to offer the same level of coverage as before.
When purchasing renters insurance, the insurer evaluates your personal risk profile and the available funds to cover potential claims. They also consider their future liabilities and the reserves necessary to meet claim obligations. These factors collectively determine the insurance policy prices, including renters' insurance and the extent of coverage a company can provide.
However, significant events like hurricanes or terrorist attacks can lead to a surge in demand for insurance. As a result, the market may experience a shortage of insurance capacity, causing companies to be unable or unwilling to offer the same level of coverage as before. This shortage presents challenges for both insurtechs seeking coverage and consumers seeking to purchase or renew their policies. Ultimately, it results in higher prices and limited coverage options for consumers.
Effects on gross written premium
The capacity to underwrite cyber risk coverage is not constrained by the availability of insurance or reinsurance contracts. Instead, it is influenced by the gross written premium (GWP) and the total exposure of the coverage. Insurance carriers are inclined to offer coverage to risks that have demonstrated improved security measures. However, risks that have not taken adequate steps to enhance their security posture may face policy cancellations.
The occurrence of ransomware attacks in recent years has not affected insurance capacity directly. Nevertheless, it has resulted in increased premiums, subsequently expanding the capacity for underwriting cyber risk coverage.
In the context of a pure form, capacity is solely determined by the GWP. When the number of available insurance or reinsurance contracts exceeds the risks that need coverage, the market has an excess of capacity. Conversely, if there are more risks to be covered than available contracts, the market is said to have a deficiency of capacity.
The total exposure, which refers to the amount of risk covered by a form or policy, is established using the GWP. This estimation represents the worst-case scenario, indicating the maximum potential damage that could result from an event. For instance, in the case of a hurricane hitting a city, the GWP is utilized to estimate the overall damage that could occur. This calculation helps determine the maximum coverage amount that can be provided.
Understanding insurance capacity is crucial as it can impact the pricing of individual policies. When there is a shortage of capacity in the market, prices tend to rise.
Target Customers
Reinsurance companies, insurance companies, and self-insured organizations all need to have capacity. Reinsurers provide coverage for insurers. This is important because it helps to spread the risk. If one insurer has a lot of claims, the reinsurer can help to cover those claims. This protects the insurer from having to pay out all of the money themselves. Insurance companies need to have capacity so that they can provide coverage to their policyholders. Self-insured organizations also need to have capacity. These are organizations that don't carry insurance. Instead, they set aside money to pay for claims themselves.
How to get reinsurance capacity
There are a few ways to get reinsurance capacity. Let's take a look at each one.
The first way is to get a reinsurance broker
A broker is a middleman who can help you to find a reinsurer. They'll work with you to find a company that's willing to provide the coverage you need. This can be a good option because it gives you access to a lot of different companies. And, it can be helpful to have someone who knows the market and can help you to negotiate a good deal. For instance, Lockton Re is a brokerage firm that is committed to providing excellent client service and innovative technology that helps businesses optimize their risk. With over 125 years of experience in the industry, Lockton Re has the knowledge and resources to help. The company is the largest privately held insurance brokerage firm in the world and provides insurance, and risk management. Lockton Re is an example of a reinsurance broker but there are other firms who specialize in this.
Work with a company that connects capacity and insurtechs
Some companies work with insurtechs to help them find the capacity they need. These companies use technology to connect businesses with the right insurers. For instance, stere.io designed an ecosystem that connects "capacity seekers" such as MGAs, insurtechs or embedded insurance partners, with "capacity providers" like carriers and reinsurers. Their framework ensures reduction in placement times and our algorithm will support you by making "smart recommendations" to connect with the type of partner you're looking for. This can be a good option because it's a quick and easy way to find the capacity you need. When you work with a company like this, you can also get access to other resources that can help your business.
Find a reinsurance partner on your own
If you don't want to use a broker or work with a company that connects businesses with insurers, you can find a reinsurance partner on your own. You can search for companies that provide the type of coverage you need. Then, you can reach out to them and see if they're willing to provide you with the coverage you need.
Finding a reinsurer can be a challenge. But, it's important to make sure you have the coverage you need. If you don't have enough capacity, you could end up having to pay for claims yourself.
A great example is Munich Re; a global provider of reinsurance, primary insurance and insurance-related risk solutions. Munich Re is likely an organization to consider for any insurtech entrepreneur or company as they're always on the lookout for new, innovative insurance solutions that will help to shape the future of the industry. Insurtech entrepreneurs can utilize the company's deep reinsurance capacity to develop sustainable value and new business opportunities. The ability to accelerate and launch new products at scale, along with our dedicated innovation teams, makes Munich Re a strong partner for any insurtech business.
Another example is Swiss Re. Life & Health and Property & Casualty are both covered by the Swiss Reinsurance Business Unit. The company was founded in Zurich, Switzerland in 1863 and has been in the reinsurance business since then. It operates through more than 70 offices in over 30 countries. This makes it one of the largest reinsurance companies in the world.
Leverage a fronter/fronting company
This is an interesting option if you're looking for more flexibility or if you want to work with a company that has a lot of experience. A fronter/fronting company is a company that provides reinsurance coverage to another company. The fronting company then cedes the risk to the re-insurer. In other words the fronter provides the license(s) per line of business per state, typically taking 6% of gross written premium as a fee and typically the fronter takes on little to no risk. This enables an insurtech to go to market a bit quicker. This can be a good option because it gives you more flexibility. You can work with a company that has a lot of experience and that can provide you with the coverage you need.
For example, QBE is a fronter/fronting company. It's one of the largest global insurers and reinsurers. The company has operations in over 31 countries and offers a variety of insurance products, including General Liability, Motor, Financial Lines, WCA and Cyber.
Quota share treaty may be relevant
Think of a quota share treaty as a way to boost your company's capital while still sharing premiums and losses with another insurer. In this type of reinsurance contract, the insurer and reinsurer agree to share risk up to a predetermined maximum coverage percentage. By retaining some risk and premium, the insurer can preserve some capital. Overall, quota share reinsurance is a great way to protect your company's bottom line.
Best practices
When expanding your business, it is best practice to get a reinsurance panel. A reinsurance panel is where you have multiple reinsurers all provide some percentage of capacity which is proportional to the risk they take. This allows for diversity and stability within your company. For example, Hippo has announced its diversified panel of reinsurers to support its plans for continued expansion in the year ahead. By having a reinsurance panel, Hippo is better equipped to handle any unforeseen bumps in the road.
In other words, there is 100% of the pie to be distributed among the reinsurers. The insurer decides how much each reinsurer should get taking into account their risk appetite.
This is beneficial for the company because it provides diversity and stability within your company. For example, if one reinsurer becomes insolvent, the others can still cover the losses. This is opposed to having just one reinsurer who would then be solely responsible for any losses. This is beneficial when market conditions change, and a reinsurer reduces the amount of capacity they will provide to your insurtech. For example, let’s say you have a panel made up of six capacity providers, if one reinsurer only is covering 15% of your capacity and they wish to stop providing capacity altogether it is much easier to find someone else from your panel to increase the amount or another company from the market willing to provide 15% capacity as opposed to say 75%.