Insurance, ReInsurance & InsureTech (with guest Randel Bennett) 03-29-2024

Published Date: 03/29/2024

The Future of Insurance: How Reinsurance and InsurTech Are Reshaping Risk

The insurance world is in flux. From rising premiums to regulatory gridlock and the growing role of artificial intelligence, the industry faces one of its most complex periods in decades. In a recent episode of Insurance Hour, host Karl Susman sat down with Randel Bennett, former VP at Swiss Re and founder of Quickscent, to unpack how reinsurance, technology, and innovation are reshaping the insurance landscape.

Understanding the Chain of Protection: Reinsurance 101

Most consumers see only one side of insurance—their personal policy. But behind every homeowners or auto insurer stands another crucial layer: the reinsurer. As Bennett explained, reinsurance is simply insurance for insurance companies. It’s how insurers spread their risk and protect themselves from catastrophic loss.

Here’s how it works: when a primary insurance company writes a policy, it takes on the risk of potential loss. But no insurer wants to hold too much exposure in one area—say, a thousand homes in a wildfire zone. To stay solvent, it sells a portion of that risk to a reinsurer. The reinsurer gets a share of the premium and, in return, agrees to pay a share of any losses.

This relationship has long been the backbone of global stability in the insurance market. But that stability comes at a cost—and that cost is climbing fast.

The Rising Cost of Reinsurance—and Why It Matters to You

In recent years, reinsurance costs have surged, driven by natural disasters, inflation, and global market volatility. Bennett explained that a decade ago, an insurer could easily find a reinsurer willing to take on a full share of their risk, sometimes 80–100%, leaving the primary carrier with little “skin in the game.” Today, that world is gone.

Reinsurers now demand more from insurers. Instead of covering all of a carrier’s exposure, they’re layering their participation—perhaps 20% with one reinsurer, 10% with another, and so on—until the full book is protected. Each layer takes a cut, sometimes 3–6% in fees, and that cost trickles down.

For consumers, the result is painfully familiar: rising premiums. Every time a reinsurer increases its price, it drives up the insurer’s cost to operate. In most states, insurers can pass these costs on to consumers through rate filings. But in states like California, where regulations restrict rate increases tied to reinsurance costs, the math simply doesn’t work. Insurers can’t afford to stay, and they leave.

This domino effect explains the exodus of carriers from high-risk states and the emergence of state-run insurance entities like California’s FAIR Plan or Florida’s Citizens Property Insurance Corp.—organizations created to fill the void left by private insurers but now themselves struggling to stay solvent.

The Global Connection: When a Fire in Taiwan Impacts a Home in Nevada

Insurance is an interconnected system. A single catastrophic event anywhere in the world can ripple through reinsurance markets everywhere. As Bennett put it, a warehouse fire in Taiwan might not seem relevant to a homeowner in Nevada—but if the same reinsurer covers both regions, that loss eats into their global capacity, tightening the market and pushing up prices worldwide.

Reinsurers are global financial institutions. Their capital is finite, and when it’s tied up in one region’s disasters, they must either charge more or pull back capacity elsewhere. The result is a shrinking supply of reinsurance—making it even harder for primary insurers to find affordable coverage. It’s a vicious cycle, and it’s reshaping the insurance landscape from the top down.

Why Reinsurance Solvency Matters

To understand why this system is vital, imagine a world without reinsurance. Every major carrier would be responsible for every claim, no matter how large. One hurricane, one wildfire, or one earthquake could bankrupt an insurer overnight. Reinsurance provides a financial safety net that ensures claims are paid, markets remain stable, and policyholders are protected even in worst-case scenarios.

As Susman noted, reinsurance is what prevents a “run on the bank” in the insurance world. It’s the invisible scaffolding that holds up the entire system. But when that scaffolding weakens—through high costs, tight markets, or lack of capacity—the entire structure becomes unstable.

The InsurTech Revolution: From Disruption to Integration

While reinsurance keeps the system solvent, InsurTech is redefining how that system operates. The term—short for insurance technology—refers to companies that use advanced tech tools to innovate in underwriting, pricing, and claims handling.

Bennett described today’s InsurTechs as “insurance companies with a technological acumen.” In other words, they’re not replacing traditional insurers but enhancing them. Early InsurTechs promised to revolutionize the industry, often boasting algorithms that could “predict” risk better than human underwriters. Some succeeded, but many overpromised and underestimated the complexity of claims and regulations.

The new generation of InsurTech firms takes a more grounded approach. They’re integrating technology into every stage of the process—using AI to assist underwriters, predictive analytics to model risk, and machine learning to detect fraud—without eliminating the human oversight that ensures fairness and accuracy.

As Bennett put it, “AI isn’t replacing people; it’s becoming their co-pilot.” That means claims adjusters, agents, and underwriters can work smarter and faster, with real-time data guiding every decision.

Risk Mitigation: The New Frontier

Perhaps the most important shift in insurance today isn’t about who pays for risk, but how risk is prevented. Bennett emphasized that modern insurance is moving from “paying for loss” to “preventing loss.” Instead of merely identifying and pricing risk, insurers are investing in risk mitigation—helping homeowners and businesses take proactive steps to reduce exposure.

For instance, California now requires insurers to offer discounts for wildfire mitigation measures such as defensible space, ember-resistant vents, or fire-retardant roofing. This not only rewards responsible behavior but also makes the insurance system more sustainable. As Susman noted, “The ideal is no loss. Loss is bad. If you can prevent it, you should.”

Incentivizing prevention represents a philosophical shift. For decades, insurance has been a safety net—a reactive tool. Now, it’s becoming a partnership between insurers and policyholders, aimed at minimizing losses before they happen.

Where Regulation Meets Reality

While innovation moves quickly, regulation often does not. In states like California, insurers must submit detailed rate filings and justify any increases. If the cost of reinsurance spikes by 20%, but the state caps allowable increases at 7%, insurers are trapped between unsustainable losses and political pressure.

This regulatory lag fuels market instability. As Susman explained, “When carriers can’t adjust pricing to match reinsurance costs, they stop writing business.” The result? Fewer carriers, less competition, and higher prices for consumers—a paradox created by the very laws meant to protect them.

A Cautionary Tale: Florida’s Struggle

Florida’s insurance crisis is a stark warning. After years of devastating hurricanes and rampant litigation, at least seven carriers went insolvent in 2023 alone. The state’s insurer of last resort, Citizens Property Insurance, has ballooned to over 1.4 million policies—and even it had to take out a credit line to cover potential claims.

As Bennett dryly noted, “It’s never a good sign when your insurance company needs insurance.” The irony underscores a deeper truth: when reinsurance markets tighten and regulation fails to adapt, even state-backed insurers face financial peril.

The Road Ahead: Data, Technology, and Accountability

Despite the challenges, both Susman and Bennett see a path forward—one built on data-driven decision-making, transparency, and consumer education.

• Data will drive more accurate pricing and underwriting.
• AI and automation will improve efficiency and reduce costs.
• Risk mitigation incentives will align consumer behavior with insurer sustainability.
• Public awareness will help shift the perception of insurance from a burden to a tool for resilience.

Ultimately, the future of insurance depends on balance—balancing innovation with oversight, affordability with solvency, and automation with accountability.

As Susman concluded, “The industry doesn’t need to be reinvented. It needs to be realigned—with technology, transparency, and trust at its core.”

Key Takeaway:
Reinsurance keeps the system stable, InsurTech makes it smarter, and risk mitigation makes it sustainable. Together, they form the foundation of a more resilient insurance future—one that rewards responsibility, embraces innovation, and helps consumers truly understand the value of protection.