State Farm Florida Insurance Company

(a subsidiary of State Farm Mutual Insurance Company)

Facts about Reinsurance

An insurance company such as State Farm Florida is in the business of assuming risk. It takes capital (i.e., surplus) to assume risk. If a company does; not have the surplus necessary to assume a particular level of risk, it must either; stop writing that risk or "rent" the capital from others. Reinsurance is a vehicle by which the insurance company "rents" capital.

Reinsurance is a critical component in most insurance companies' business strategies, especially in high-risk, catastrophe-prone areas like Florida where the risk of solvency-threatening events is present. Essentially, reinsurance is insurance for insurance companies - a way to prepare for the possibility of large losses in a financially responsible way.Just like you as individuals buy insurance on your home and auto to provide financial protection in the case of some unforeseen event, insurance companies like State Farm Florida buy reinsurance to provide financial protection in the case of catastrophic events like a hurricane.

The cost of doing business (i.e., cost of capital) for both insurers and reinsurers in a catastrophe-prone state like Florida is high (just like an investment - you demand a higher return on a riskier investment). As a result, the cost of insurance and the cost of reinsurance are high relative to other areas of the country that are less prone to catastrophe events. While State Farm Florida purchases as much reinsurance as possible from the lower-priced options, it still must purchase a significant amount from the open reinsurance market, which is more costly.