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Chapter 11 Casualty reinsurance 11/5

Table 11.1: Combining classes for reinsurance
Advantages Disadvantages
• In many cases, reinsurance requirements are similar • Reinsured unable to split reinsurance costs accurately
across the classes, thus one treaty for all classes can between departments.
be suitable.
• Calculation and payment of instalments and • A common retention level across all classes for excess
adjustments allows for ease of administration. of loss cover may not be attractive for a reinsured if its
combined account is dominated by motor business.
• Allows small companies in particular to include classes • It is more difficult for the reinsurer to exercise
too small to warrant separate reinsurance treaties underwriting judgment, as the results of different
within their main treaty. classes are obscured.
• Can maintain flexibility by purchasing different limits • Different classes of business may end up subsidising
under excess of loss treaties for different classes. each other.

Be aware
A reinsured’s motor account would be capable of sustaining a high reinsurance retention, but its public liability or
employers’ liability (EL) accounts might be a fraction of the size but would still have to carry the same retention
under a combined protection.

A6 Clash cover

Typically, writing a casualty account exposes a reinsured to accumulation risks, that is, to multiple
retentions when two or more of its insureds suffer a loss from the same occurrence. This exposure is
increasingly countered with a clash excess of loss reinsurance policy, providing protection on an
event basis.

Example 11.2
A chemical plant has an explosion that injures workers and neighbours. The plant’s insurer could trigger its casualty Reference copy for CII Face to Face Training
clash coverage if the insurer wrote both the plant’s workers’ compensation policy and general liability policy.

The market remains relatively small, but larger insurers are showing a renewed interest with small or
midsize carriers being the most common buyers. Large carriers have shied away from casualty clash
coverage since the 1990s because of pricing and terms.
While property catastrophe losses tend to receive most attention, casualty catastrophes are often more
severe.

Activity
High-profile casualty events include the dotcom bubble burst, the accounting debacles involving Enron and
WorldCom, not to mention the US subprime mortgage market and the Madoff Ponzi scheme. Find out what you can
about these catastrophes and how each of these events destroyed tremendous amounts of shareholder capital and
led to economic damages that dwarf the most severe property catastrophe damages.

In 2016, insured property catastrophe damages were estimated at US$54 billion worldwide, while the
financial crisis of a few years earlier is estimated to have had an economic impact of more than US$1
trillion.
While insurers are becoming adept at modelling for property catastrophe exposure and accumulation,
modelling for casualty catastrophes appears to lag some way behind. Insurers need to look more closely
at the relationships between companies in certain industries and how they can use casualty catastrophe
modelling as a risk management tool.
Having described the main issues with respect to reinsuring liability business, let us now look into the
various classes and special considerations that apply. Note that certain common exclusions appear in
casualty reinsurance contracts. You can see a typical list of them (other than motor) in appendix 11.1.
There is a separate list for a motor account in appendix 11.2. These appendices are both available on
RevisionMate.

Reinforce
Before you move on to look at the various classes of liability insurance, make sure that you understand the three Chapter
types of loss in liability insurance, the underwriting considerations and the types of reinsurance purchased. 11