Karl's Comments - 12-05-2024 - Workshop Examining Net Cost of Reinsurance and Ratemaking

From Insurance Hour · 3:40

Show by Karl Susman

Reinsurance, Regulation, and Reform: Why California's Insurance Rules Are Driving the Market to the Brink In California's rapidly evolving insurance landscape, one term keeps resurfacing in every serious policy discussion: reinsurance. While it might sound like an abstract industry concept, it is, in fact, the invisible safety net that keeps the insurance market stable, solvent, and responsive to consumers' needs. During the California Department of Insurance (CDI) Workshop on the Net Cost of Reinsurance and Ratemaking on December 5, 2024, veteran insurance expert Karl Susman delivered pointed remarks that crystallized a growing concern within the industry — that California's regulatory structure is unintentionally punishing insurers for doing the very thing that protects consumers most: buying reinsurance. What Is Reinsurance — and Why It Matters to You At its core, reinsurance is insurance for insurance companies. It allows insurers to share part of the financial risk they take on when writing policies. By purchasing reinsurance, an insurer spreads potential losses across multiple entities, effectively creating a safety cushion that ensures claims can be paid even after catastrophic events — such as wildfires, earthquakes, or massive storm systems. As Susman explained during his testimony: "It's common sense. If we want to ensure there's enough money to pay claims, we'd rather have a policy backed by several reinsurance companies than just one. Many wallets of money are better than one." This risk diversification benefits everyone — insurers gain financial stability, and consumers gain confidence that their claims will be honored. In essence, reinsurance is a consumer protection tool disguised as a business transaction. The Regulatory Disconnect: When Doing the Right Thing Costs More California's insurance market, long governed under Proposition 103 (1988), gives the Department of Insurance tight control over rate approvals. Insurers must file detailed justifications for every rate increase, including actuarial data on losses, expenses, and risk exposure. Here's the problem, as Susman outlined it: "In the calculation of those expenses, the department does not permit insurance companies to include the actual costs they've paid for reinsurance." This creates what he described as a "disincentive for financial prudence." In other words, insurers who buy reinsurance — a prudent act that makes them more stable and reliable — are effectively penalized, because they cannot recover those costs in the rates they charge policyholders.

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