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Catastrophes prompt re-examination of time and geographic limits on “occurrences” in reinsurance coverage


May 25, 2012   by Canadian Underwriter


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Recent global catastrophe events have led to a re-examination of time and geographic limits in reinsurance contracts that define the “occurrence” of a single catastrophic event.

Don Morrison, vice president of the Canadian office of the global reinsurance broker Guy Carpenter, made the observation in Toronto at the May 2012 Friday Forum, hosted by the Institute for Catastrophic Loss Reduction (ICLR). Morrison was talking about reinstatements of cover during his May 25 presentation on reinsurance concepts.

Reinstatements of cover restore the reinsurance coverage limits available to insurance companies that must pay out catastrophe damage claims. The Reinsurance Association of America (RAA) offers the following example of how reinstatement cover works.

“After the major windstorms of 2004 and 2005, ceding [insurance] companies that sustained losses reinsured under their reinsurance contracts may have lacked sufficient reinsurance protection for the remainder of the year,” the RAA notes in its glossary of terms. “In such an instance, those insurers might attempt to secure reinsurance to replace that no longer available under the original contracts.”

Reinstatement cover is provided based on the “occurrence” of a catastrophe. Typically, limitation periods on timing and geography are in place to define what counts as a single “occurrence” of an event.

Morrison said the traditional Canadian approach to reinsuring windstorm losses includes a 72-hour limit for a catastrophe occurrence, but reinstatement cover might allow for related losses sustained for longer than that period.

“There was a change in the U.S. to prevent you from reinstating your wind cover beyond a 72-hour period because of Hurricane Andrew in 1992,” Morrison said. “Hurricane Andrew actually made landfall in Florida and then crossed into the Gulf Coast outside the 72-hour period. We’re seeing more and more cases like that where [storms] are skating up the North American east coast, maybe glancing off Carolina and then appearing in Canada or New York. So there is an extended time period. I’m seeing more flexibility of late in the wind area.”

Morrison noted that wildfire events also have resulted in some flexibility in the geographic restrictions. “The San Diego wildfires from years back had multiple causes of loss, but they all converged into one big conflagration,” Morrison said. “They were widely considered to be one event even if the proximate causes of the fire were different.”

Reinsurance for earthquake coverage used to fall under a general, 160-hour limit, Morrison said. But “because of aftershocks, particularly in New Zealand, where they lasted for days and days, it became necessary to review that.”

Other geographic limits are under review as well, Morrison added. “They are going away from a condition built into Canadian models that the loss must happen in a contiguous manner, in contiguous provinces,” he said.

“They are considering dropping that condition because of the tsunami threat. You can have a tsunami that strikes one province and skip another one, or skip along the west coast of North America, hit California, miss Oregon and Washington and hit B.C. They’re not contiguous.”


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