As I sit in the living room of our home in North Idaho I can smell smoke from fires burning in the forests of Washington, Montana, Idaho and from our neighbor to the north, Canada. I smell this smoke while watching the weather channel report of hurricanes in Texas, flooding in Louisiana, and record setting rainfall in other parts of the country. Every one of those regions have insurance companies who will be called upon to alleviate the financial losses incurred by their insureds. The companies even pride themselves in showing how their adjusters are rushing to the scene of the catastrophe, arriving with checkbook in one hand and flashlight in the other.

It reminds me a lot of the military advertisement showing a huge dust storm brewing on the horizon with the civilian population running away from the storm as the military runs toward the storm with the caption, “the few, the proud, the marines.” I must admit it makes me feel really quite secure knowing they are there.

When the tempest is gone the marines go back to their other duties, but what does the insurance company do to prepare itself for the next catastrophe. It is another miracle of the concept of insurance which is, each of us as individuals don’t know if we are going to be the one who needs help so we band together through insurance companies to provide the financial assistance to our neighbor. Insurance companies do the same thing. They plan ahead for such an event.

Claims which come in the normal range of daily risks can normally be absorbed by any individual company, but when you have huge shock losses (losses which are occasional but high severity when they occur) the company needs to be able to have spread the risk prior to the loss. Consequently, when a risk is presented to the insurance company for insurance the primary insurance company determines how much they will keep in house and how much they will in turn “cede” or transfer out. For example, they will for a risk insured for $600,000 determine they will absorb the first $100000 and cede out to their reinsurers the $500,000 balance. When the loss occurs, the primary carrier pays the whole amount and then seeks reimbursement from the reinsurers. This system makes claim settlement seamless for the affected party with them never knowing an insurance company somewhere else is picking up a portion of the loss.

This is how those fires burning homes in the woods of the Northwest and the flood damage and rain damage to homes in the Southwest and Midwest impact practically all insurance companies no matter where they may be primarily located. That is why a company domiciled in Idaho and doing primary business only in Idaho paid over $300,000 for losses occurred in Florida after Hurricane Katrina.
Due to the size of the insurance industry premiums in the makeup of the GNP, huge losses are noticeable but don’t put insurance companies out of business. They live to answer the call again when the storm appears on the horizon. Complicated in its inception but beautifully simple in its implementation! GO INSURANCE AGENTS!!!

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