Only small portion of flood loss ceded to UK reinsurers

Only a small proportion of the 2007 flood losses in the United Kingdom was ceded to reinsurers, while most of the damage losses were absorbed by the direct insurance industry, a Guy Carpenter report says.
According to the report, Wrong Type of Rain: Impact and Implications of 2007 UK Floods, two factors determined the allocation of the losses between insurers and reinsurers the so-called hours clause, and the increase in attachment levels for U.K. and pan-European catastrophe programmes.
Most catastrophe excess-of-loss wordings have an hours clause.
“This attempts to split catastrophe events that exceed a certain duration into individual loss occurrences, which are defined periods of time for each peril,” according to the report. “The start of a loss occurrence is usually decided by the reinsured and subject to certain conditions specified in the wording.”
Due to the length of the flood events, this application came into play for most of the 2007 floods.
In addition, over the last number of years, there has been an increase in attachment levels for catastrophe programs.
“This increase has been driven by mergers and acquisitions, efforts to control reinsurance costs and an increasing focus on capital management,” the report notes. “On average, U.K. catastrophe programmes now attach at around a 1-in-10 year return period, which equates to an estimated 1.5 billion [Cdn$3.2 billion] insured loss.”
The report notes that despite these two factors, some programs with lower-than-average attachment points were hit, though losses have been typically limited to the first layers.