Why Cat Season Gives Insurers Pause

iStock_000010149937XSmallBefore you conjure up images of litter or cute little kittens, cat season in insurance terms is a slightly different concept. It doesn’t actually involve any felines — except maybe those who are displaced along with their human companions due to natural disasters that tend to strike during a specific time of year. In the world of property insurance, which includes home insurance, the “cat” in cat season is short for “catastrophe.” The cat season is generally accepted to mean the period in late summer when hurricanes are most active and through the winter storm season. How the insurance industry fares during cat season has a significant impact on rates for the coming year.

According to Property Casualty 360, the 2012-2013 cat season seems to have passed with only moderate rate increases. This is fairly remarkable considering the significant losses arising out of superstorm Sandy that struck during the tail end of hurricane season on the East Coast. Of course, rates that rise slightly on average across the nation means there are greater fluctuations within individual regions. If you were a resident of New Jersey, as an example, your recent insurance renewals may have significantly higher rates than homeowners in other states.

Instead of just focusing on your own backyard, it’s sometimes a good idea to keep an eye on what’s going on around you. The global insurance market is interconnected through the reinsurance markets. While you purchase insurance directly from your home insurance company, your home insurance company is also purchasing insurance from a reinsurance company. Reinsurance companies insure insurance companies. Sound confusing? Think of your insurance policy as a commodity that can be bought and sold in a marketplace.

Your insurance company may not have the ability to write as many policies as it does without additional financial support. Sometimes your insurance company might want to take only the low level of risk on your policy and wishes to have someone else take the higher risk. For example, if you have a $200,000 limit on your policy, your insurer might only be responsible for the first $100,000. It’s possible that the insurer has an agreement with a reinsurer to pay claims over $100,000 on all the policies it sells.

These reinsurance transactions happen behind the scenes and you generally won’t even know how much, if any, reinsurance is on your policy. However, reinsurers work on a broader, more global basis than some of the local insurance companies that might sell you a direct policy. The cost of reinsurance frequently dictates the cost of insurance an insurer will directly charge to its policyholders. Therefore, even though there may be catastrophes halfway around the world, the effect they have on global reinsurers can significantly impact the price you pay for your home insurance.

All of this is probably a lot to absorb when you’re just thinking about your little house in your quiet little neighborhood. However, knowing that the insurance you purchase may be supported by a global reinsurer that also supports a similar house on another continent might lend a bit of perspective to your policy. As a result, when cat season comes and goes each year, you can breathe a sigh of relief if it’s been relatively quiet around the world, knowing that your rates might not increase on renewal.

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