Remoteness has been used to downplay the threat, causing carriers to overlook a more immediate, though less menacing, concern. A substantial loss may not imperil company operations, but it could lead to an unexpected earnings hit, the effects of which would be magnified for shareholders. Unanticipated large losses typically result in a disproportionate impact on market capitalization. Casualty clash and catastrophe protection, consequently, can be a vital tool in managing overall financial performance.
Casualty clash reinsurance normally sits at the top of a casualty insurer’s reinsurance coverage tower and thus typically attaches at higher levels. In some cases, insurers can purchase clash cover attaching at a lower retention, covering multiple insureds and treaty retentions where there is no underlying single-line reinsurance in place. When this is the structure, the reinsurance is more challenging to underwrite because coverage is triggered more often and consequently the protection is more costly. Since an increasing number of carriers have been retaining larger nets on some lines of casualty business, clash reinsurance is becoming more cedent desirable. And from an enterprise risk management perspective, casualty insurers would like to have the reinsurance protecting these previously unsuspected casualty loss scenarios.
The terms “casualty clash” and “casualty catastrophe” may seem new, but the concepts certainly are not. An increasingly complex and interconnected global business community has made many large (and even small) companies quite efficient. Being fast and lean is no longer a genuine competitive advantage. Rather, it’s the price of admission to many global — and local — markets. Yet the ease of coordination and collaboration along today’s supply chains also transmits risk as well as cost savings and operational efficiency. One company’s liability exposure could spread to its suppliers, partners and service providers. But, these weaknesses are not immediately evident. Instead, they sit dormant — and concealed — until a loss-triggering event occurs.
Casualty clash involves a loss to multiple policies or insureds from a single event. An event that leads to both directors and officers (D&O) and errors and omissions (E&O) claims, for example, could result in a casualty clash scenario. The insured losses would be higher than anticipated since several lines of business are involved. A casualty clash scenario that grows to disastrous proportions is called a “casualty catastrophe.” Insured losses can span companies, geographic borders, industries and lines of business. Though the insured losses sustained may be lower than those of property catastrophes, the economic damage is almost always much, much greater.
There are two types of clash scenarios: systemic and classic. Systemic clash involves the degree of regulation in an industry, the extent of common practices, and vulnerability to an economic downturn. Thus, an industry that is highly regulated and highly exposed to an economic downturn — with operating practices that are common among its companies — is exposed to substantial casualty clash and catastrophe risk. Classic clash, on the other hand, may result from a long supply chain (including service or advisory), the use or development of hazardous products, exposure to the general public or the engagement of large amounts of subcontractors. Casualty catastrophes can result from both systemic and classic clash elements.
Originally published in Reinsurance Encounters