November 26th, 2012

Reinsurance Protection

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President

Aggregate Covers

Reinsurance remains the best form of protection against catastrophe losses. Following the increased frequency of major catastrophic events witnessed in 2010 and 2011, many companies are revisiting the benefits of aggregate coverage. Aggregate coverage has long been offered in the reinsurance market because it is a solution that focuses on mitigating the impact of the frequency of loss. While much of the focus for catastrophe coverage is around severe shock losses, aggregates are also useful for horizontal coverage needs or a combination of frequency and severity.

For catastrophe losses, the potential for results to be eroded by frequency of loss as well as severity is a key risk. Buyers of aggregate coverage tend to vary from insurers that have implemented coverage as an integral part of their programs to companies interested in opportune purchases depending on market conditions, budget constraints and loss activity. Reinsurers distinguish between these types of buyers, and during periods of scarce supply or pricing pressure, capacity tends to be allocated to core buyers.

There are various types of aggregate coverage. Protection includes whole account aggregate stop loss coverage and property loss ratio cover. Both products provide tailored frequency and severity protection. Multi-year excess of loss helps insurers reduce reinsurance costs where aggregation of frequency is a concern, and it is particularly useful for catastrophe exposures. Top and drop coverage, meanwhile, helps reinsurance buyers by providing a solution for limits in excess of high attachments and sideways attachments for additional frequency protection (second, third or fourth events).

Non-traditional Reinsurance Solutions

Looking ahead, demand for non-traditional reinsurance cover is also likely to increase in developing economies. As insurers strengthen their presence in emerging markets and modeling solutions in these territories are subsequently improved, catastrophe bonds and industry loss warranties products (such as Guy Carpenter’s CWIL®) will offer companies viable alternative reinsurance protection. Solutions such as these are likely play an important role in protecting insurers from large catastrophe payouts as they pursue growth opportunities in new markets.

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