October 21st, 2009

Casualty Clash and Casualty Catastrophe Risks, Part III: Renewed Interest in Casualty Clash Reinsurance

Posted at 1:00 AM ET

metropoulos_emil_bioEmil Metropoulos, Senior Vice President

Perhaps because of market conditions last year — and a general increase in awareness — larger insurers paid more attention to casualty clash and catastrophe risk at the Jan. 1, 2009, reinsurance renewal. This followed several years in which they did not secure much protection. Even with the increase in interest in this form of cover, capacity was adequate, and pricing remained stable. Historically, product availability, terms and pricing prevented the widespread purchase of protection. Since many of these cedents now have larger net lines on their portfolios — and plenty of available reinsurance capacity — they are beginning to secure the protection they need. Changes in capital availability and terms have helped cedents.

Casualty clash and catastrophe cover is not as exotic as its name may imply. This protection consists simply of a per occurrence excess of loss (XOL) reinsurance contract, which protects the insurer from a specific event’s losses that affect several lines of business or insureds. There are more than a dozen markets in the United States and Bermuda that offer casualty clash and catastrophe cover, with a typical market having capacity of up to USD100 million — though some sources of capital can provide much more.

Casualty clash reinsurance rates were up 1.1 percent on average at the January renewal. Specific layers renewed at rates ranging from minus 12.3 percent to 17.5 percent, with changes based largely on loss history, changes to retentions and limits, and other program-specific considerations.

Most programs renewed at expiring or more favorable terms. Forty-five percent were able to secure decreases, with 25 percent staying steady. Thirty percent of layers sustained price increases. Despite the renewed interest among larger insurers, few changes were made this year. Only 6 percent of renewing programs increased retentions, and 23 percent lowered them. Fifteen percent increased limits, with only 8 percent going in the other direction. Seventy-two percent of programs did not change retentions at all, and 77 percent made no changes to limits.

So, prices generally have remained steady. And, cedents are exploring this market with fresh vigor. The remote threats to solvency aside, casualty insurers need to address the more likely risks associated with the impairment of earnings that result from unexpected large losses. Publicly traded carriers stand to lose market capitalization at a rate disproportionate with the earnings effect, suggesting that the true value of casualty clash and catastrophe risk management stretches far beyond the balance sheet.

Originally published in Reinsurance Encounters

Part I: Clashing and Catastrophic Casualty Events >>

Part II: Age of Casualty Catastrophe Risks >>

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