The Church Insurance Company estimates that every 100 years it will confront an event creating losses of $40 million. This calculation is based on geography and the replacement value of church property.
While such an occurrence sounds rare, it boils down to a 20 percent chance of this kind of devastating event every 20 years. To protect itself and the churches it insures, Church Insurance has a $40 million catastrophe cover in place to deal with this "100 year event." Known as reinsurance, this coverage allows the company to take on the extreme risk of catastrophic events.
Reinsurance increases stability
In the insurance business, actuaries use statistics and the law of large numbers to determine expected losses and the probability of how much actual losses can deviate from these expectations. Insurance companies prepare for these kinds of losses by:
- safely investing premiums to cover projected losses,
- maintaining conservatively invested surplus funds, should more be needed, and
- buying insurance on the insurance they write, or reinsurance.
Reinsurance allows insurers to operate in a stable and predictable way despite the uncertainty of catastrophic events in any given period.
When is reinsurance necessary?
While many Episcopal churches have no need for a property-casualty policy much larger than $1 million, some insured by Church Insurance are valued at more than $100 million. With reinsurance, the company insures itself against potentially enormous loss, according to Robert J. Ansalone, Senior Vice President of Church Insurance, who oversees the company's risk assessment and reinsurance program.
Natural disasters can result in major property losses. "Nobody can control nature, so it's essential to have a back-up plan in place for unforeseen disasters," says Ansalone. "We also have to adapt to changing circumstances like global warming. The storms are becoming more intense."
Take Hurricane Katrina, a powerful Category 5 hurricane and "the most destructive—and costly—natural disaster in U.S. history," according to the Federal Emergency Management Agency.
Reports estimate that Katrina caused $81-82 billion in total damages, and many Episcopal communities felt the impact. "Hurricane Katrina was catastrophic for us. Our losses were nearly $16 million," says Ansalone.
In the face of disaster, Church Insurance responded rapidly, helping devastated congregations begin the healing process. "We generally settled the Katrina claims much more quickly than other insurers, and we recouped a larger portion of these losses through our reinsurance contracts, Ansalone says.
Reinsurance also helps Church Insurance handle such liability issues as sexual misconduct.
Church Insurance's reinsurance plan
To cope with potentially large losses, Church Insurance has an extensive reinsurance plan in place. It begins with $15 million of property coverage per location and continues upward to the full extent of the property. Church Insurance is responsible for the first $500,000 per property loss.
This reinsurance is provided by Swiss Re, the largest reinsurer in the world. Headquartered in Zurich, Switzerland, Swiss Re has been in business since 1864.
Church Insurance also has a reinsurance program for such catastrophes as hurricanes, floods and earthquakes. The program is provided by insurers around the world who specialize in this type of business, including Lloyds of London in the British insurance market, the world's oldest insurance outlet.
Reinsurance is reassuring for both the company and its customers, says Ansalone, a certified public accountant and a financial expert. Spreading the risk is key to protecting Episcopal churches and their members. "That way we can protect churches against unforeseen events and are able to offer coverage to the whole church."