The insurance world is facing unprecedented challenges. From rising premiums to complex regulatory barriers, the industry is undergoing significant transformation. In a recent episode of Insurance Hour, Karl Susman sat down with Randel Bennett, former VP at Swiss Re and founder of Quickscent, to explore how reinsurance, InsurTech, and innovation are reshaping the landscape of risk and insurance.
Understanding Reinsurance: The Backbone of Insurance
Consumers often see only one side of insurance—their personal policy. However, behind every homeowners or auto insurer stands another crucial layer: reinsurance. Reinsurance is essentially insurance for insurance companies, allowing them to 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. To avoid holding too much exposure in one area (such as a wildfire-prone zone), insurers sell a portion of their risk to a reinsurer. In return, the reinsurer receives part of the premium and agrees to cover a share of any losses.
This long-standing relationship ensures global stability in the insurance market, but that stability is becoming increasingly costly.
The Rising Cost of Reinsurance
In recent years, reinsurance costs have surged, driven by natural disasters, inflation, and global market volatility. Bennett highlighted that a decade ago, reinsurers would typically take on 80–100% of an insurer's risk. Today, however, reinsurers are spreading their participation across multiple layers, with each layer charging a 3–6% fee.
For consumers, this rise in reinsurance costs directly translates into higher premiums. In states like California, where regulations limit how much insurers can raise rates based on reinsurance costs, insurers find themselves unable to adjust prices enough to remain profitable. This has led to insurer exits from high-risk states and the rise of state-run insurance entities like California’s FAIR Plan.
The Global Connection: How Global Events Affect Local Insurance
Reinsurance is an interconnected system. A catastrophe in one part of the world can ripple through reinsurance markets globally. For instance, a fire in Taiwan might seem unrelated to a homeowner in Nevada—but if the same reinsurer covers both areas, that loss will affect their global capacity, tightening the market and pushing up prices worldwide.
Reinsurers are global financial institutions with finite capital. When it’s tied up in one region’s disasters, they must either charge higher premiums or pull back capacity in other areas. This shrinking supply of reinsurance makes it harder for primary insurers to secure affordable coverage, driving up prices everywhere.
Why Reinsurance Solvency is Critical
Imagine a world without reinsurance: every insurer would be responsible for every claim, no matter the size. A single major event, like a wildfire or earthquake, could bankrupt an insurer overnight. Reinsurance provides the financial safety net that ensures claims are paid, markets remain stable, and policyholders are protected, even in the worst-case scenarios.
As Susman pointed out, reinsurance acts as the invisible scaffolding that supports the entire insurance system. When that scaffolding weakens—through high costs, tight markets, or lack of capacity—the entire structure becomes unstable.
The Role of InsurTech: Innovating Risk Management
While reinsurance keeps the system solvent, InsurTech is redefining how that system operates. InsurTech refers to insurance companies that leverage advanced technology to innovate underwriting, pricing, and claims handling.
Bennett emphasized that today’s InsurTechs are “insurance companies with a technological acumen.” Rather than replacing traditional insurers, they enhance them by integrating AI for underwriting, predictive analytics for risk modeling, and machine learning for fraud detection—without eliminating the human oversight necessary for accuracy and fairness.
As Bennett stated, “AI isn’t replacing people; it’s becoming their co-pilot.” Claims adjusters, agents, and underwriters can now work smarter and faster, thanks to real-time data guiding their decisions.
Shifting Focus: From Paying for Loss to Preventing Loss
One of the most important shifts in insurance today is the move from simply paying for loss to actively preventing loss. Insurers are increasingly investing in risk mitigation, helping homeowners and businesses take proactive steps to reduce their exposure.
For example, California now requires insurers to offer discounts for wildfire mitigation measures, such as defensible space, ember-resistant vents, and fire-retardant roofing. These measures not only reward responsible behavior but also make the insurance system more sustainable. Susman noted, “The ideal is no loss. Loss is bad. If you can prevent it, you should.”
This represents a philosophical shift—insurance is evolving from a reactive tool to a partnership between insurers and policyholders, aimed at minimizing losses before they happen.
Regulation Struggles to Keep Up with Innovation
While innovation moves quickly, regulation often does not. In states like California, insurers must submit detailed rate filings and justify increases, even when reinsurance costs spike. This regulatory lag creates instability: if the cost of reinsurance rises by 20% but the state caps allowable rate hikes at 7%, insurers are left with unsustainable losses.
As Susman pointed out, “When carriers can’t adjust pricing to match reinsurance costs, they stop writing business.” This results in fewer carriers, less competition, and higher premiums—ironically caused by the very laws meant to protect consumers.
A Cautionary Tale: Florida’s Insurance Crisis
Florida offers a cautionary tale of what happens when reinsurance markets tighten and regulation fails to adapt. After years of devastating hurricanes and rampant litigation, several carriers went insolvent in 2023. The state’s Citizens Property Insurance, now the insurer of last resort, 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, 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. This path is built on:
- Data-driven decision-making for more accurate pricing and underwriting.
- AI and automation to improve efficiency and reduce costs.
- Risk mitigation incentives that align consumer behavior with insurer sustainability.
- Public awareness to shift the perception of insurance from a burden to a tool for resilience.
Ultimately, the future of insurance depends on 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, these forces form the foundation for a more resilient insurance future—one that rewards responsibility, embraces innovation, and helps consumers understand the true value of protection.
