Reinsurance

Reinsurance is the mechanism that enables insurance companies to underwrite large risks—like apartment portfolios worth hundreds of millions of dollars—without exposing their balance sheets to catastrophic loss. When a primary insurer writes a property policy on an apartment building, it may cede (transfer) a portion of that risk to one or more reinsurers through treaty or facultative reinsurance agreements. Treaty reinsurance automatically covers all policies within a defined category, while facultative reinsurance is negotiated on an individual risk basis for large or unusual exposures.

Apartment owners rarely interact with reinsurers directly, but the reinsurance market profoundly affects the availability and pricing of apartment insurance. When reinsurers experience heavy losses from hurricanes, wildfires, or other catastrophic events, they raise their rates and tighten their terms at the January 1 and July 1 renewal dates that govern most reinsurance treaties. These cost increases flow through to the primary insurers, who pass them on to policyholders through higher premiums. The 2020-2023 cycle of elevated catastrophe losses drove reinsurance costs to historic highs, which in turn triggered significant premium increases across the apartment insurance market.

The financial strength of the reinsurer backing the primary insurer matters to apartment owners. If a reinsurer becomes insolvent, the primary insurer may lack the resources to pay large claims. Apartment owners and their advisors should evaluate not only the primary carrier's financial ratings (A.M. Best, S&P) but also the carrier's reinsurance program structure and the creditworthiness of its reinsurers, particularly for properties in catastrophe-prone regions.