Policyholders also should know that insurers are prohibited from passing along any costs without approval from state regulators. In 2009, a law allowed expedited rate filing reviews for reinsurance costs, meaning that the Florida Office of Insurance Regulation (OIR) must approve or disapprove a reinsurance-related rate increase within 45 days, rather than the 90 days it has to look at a regular rate increase. The faster review enables insurers to account for fluctuating reinsurance prices, and this has an upside to insurance consumers: If an insurance company can more quickly recoup the costs of doing business, then it can do more business. The existence of reinsurance allows insurers to write more risk, therefore bringing competition to the market.

Buying reinsurance is not optional in Florida. All insurers are required to purchase a mandatory layer of reinsurance from the state-sponsored Florida Hurricane Catastrophe Fund (Cat Fund). Because it funds a good portion of the coverage it provides by selling bonds after a major storm occurs, there is always the specter of falling short of what is needed.

So, insurers who have limited financial flexibility with their own on-hand funds seek sources of protection with private reinsurers in addition to the Cat Fund. This enables them to pay claims that may come with a major hurricane, continue to service policyholders after storm claims are paid, and earn a decent grade from rating companies.

(By the way, the state's Citizens Property Insurance Corp. is buying private reinsurance this year for the first time since 2006.)

Taking on the extreme risk of writing wind insurance in the nation's most hurricane-prone state is made possible through reinsurance. Smaller, Florida-only companies rely most heavily upon it. Without access to the worldwide resources of reinsurers, only very large national companies could write any business in Florida, and most of them have curtailed their exposure here. The truth is, reinsurance is often the cheapest and best form of capital for many of Florida's insurance companies.

It is hard for policyholders to believe that the money Florida insurers have on hand is not enough to pay for actual claims, especially following a natural disaster. Yet it is painfully true. It is challenging to figure out how the cost of reinsurance affects an individual insurer's rates because while regulators review all reinsurance contracts, reinsurance is not considered a statutory asset until reinsurance losses are incurred. That helps explain why there is a big disconnect when one looks at the annual report developed by the OIR. It shows premiums collected and claims paid out, but does not reflect the value of reinsurance. Without it, however, many Florida insurance companies would not be able to pay claims after even a relatively small hurricane.

A well-planned reinsurance program preserves policyholder surplus to pay for ordinary, everyday claims. Reinsurance pays for the extraordinary claims, such as the $11.3 billion (in 2009 dollars) in losses from Hurricane Wilma in 2005.