Climate disasters, such as floods in Quebec or wildfires in Los Angeles, are disrupting the insurance industry. In response to the increasing number of claims, insurers are adjusting their strategies, particularly by modifying contract exclusions and revising premiums. Here’s an overview of the main issues.
1. What is reinsurance?
Reinsurance is a mechanism that helps insurance companies protect themselves from excessive losses. It works as follows:
- An insurance company transfers part of its risks to a reinsurance company.
- In the event of a major disaster, reinsurance helps the insurer cover the payouts without jeopardizing its financial stability.
- This process allows for the pooling of risks on a global scale and ensures the continuity of the insurance market.
2. Exclusions in insurance contracts
With the rise in natural disasters, insurers are reviewing their contract terms. Some exclusions may be added or reinforced, including:
- Uncovered natural disasters: Some extreme weather events may be excluded from standard contracts, requiring specific coverage.
- High-risk areas: Homes located in flood-prone or wildfire-prone areas may have limited or no coverage.
- Increased deductibles: Some insurers may apply higher deductibles, such as for earthquake risk or water damage risks.
3. Increasing insurance premiums
Insurers adjust their rates based on the level of risk. Several factors contribute to the rise in premiums:
- Increase in the frequency and severity of disasters: The more frequent and destructive the weather events, the higher the compensation costs.
- Cost of reinsurance: When reinsurers increase their rates to cover higher risks, insurance companies pass these costs onto policyholders.
- Reconstruction costs: With inflation and rising construction material costs, payouts become more expensive, impacting premiums.
4. How to adapt to these changes?
In light of these changes, here are some tips for policyholders:
- Review your insurance contract: Check for exclusions and coverage specific to natural disasters.
- Invest in prevention measures: Installing flood protection devices or reinforcing fire resistance can reduce risks and potentially influence your premium.
- Avoid higher-risk areas: Before purchasing a property, ensure that it is not located in a flood-prone zone or near a watercourse.
Shopping around for different insurance options can help you find coverage that fits your budget and needs.
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