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Chapter 11 Casualty reinsurance 11/33

Example 11.14
Some outdoor sporting events are subject to the vagaries of adverse weather conditions, none more so than cricket.
A test match can often be sold out in advance yet if any day’s play is cancelled due to rain without a ball being
bowled, advance ticket sales monies would have to be refunded although the ground authorities would still incur
considerable standing costs. Such expenses including loss of revenue can be insured under so-called Pluvius or
similar policies and then subsequently reinsured on a facultative basis.

Prize indemnities, ‘hole-in-one’ and loss of revenue through industrial actions are more speculative
examples of cover bought, while performance guarantee constitutes a long-tail cover purchased at the
beginning of a construction/engineering project which is more related to liability insurance.

K3 Extended warranty and breakdown insurance

Although existing for some years in respect of private motor cars, extended warranty insurance to cover
domestic electrical goods such as washing machines, refrigerators, vacuum cleaners, televisions and
DVD recorders is a more recent development. The schemes which operate extend the original
manufacturer’s guarantee for a further period: for example, 48 months in excess of the manufacturer’s
12-month period.
Extended warranty insurance usually covers the cost of repairs or replacement in the event of breakdown
due to faulty workmanship or material used in manufacture and is not designed to provide full
breakdown cover. Therefore, accidental damage and claims for wear and tear are usually excluded. Such
risks have high levels of homogeneity and so are well-suited to proportional forms of reinsurance.

L Claims management

For the insurer, claims handling is a particularly demanding task. This is due to the special
Claims handling is a
characteristics of casualty business. There is a need to clarify questions of liability, especially important particularly
for professional liabilities, in respect of: demanding task
• long periods of claims settlement; Reference copy for CII Face to Face Training
• problems of long-tail claims;
• influence of external factors, such as legislation, court decisions and economic developments, e.g.
exchange rate fluctuations; and
• building of reserves.
As a result of the problems described, the incorporation of a claims cooperation clause into reinsurance
treaties can be beneficial as it allows reinsurers to support this process. It is also advisable to agree
upon a claims notification clause as this assists in the setting of adequate loss reserve estimates that
allow for price increases due to inflation in the cost of settlement of bodily injury claims. The reinsurer is
thus able to deal more efficiently with the long-tail-claim risk.

Be aware
The management of claims by the insurance companies is of vital importance to reinsurance companies. The
insurance company must ensure effective administration and management of claims without compromising the
quality of services or growing customer expectation. If this does not occur there would be serious repercussions for
both the insurance company itself and the reinsurer.

To allow underwriting to be adapted quickly and specifically to the claims development, it is necessary
to have a continuous flow of information between claims departments and underwriters so that loss
experience can be taken into account and loss information used as a basis for developing mathematical
reserving models and rating tools. Claims information serves as an important basis for decisions
regarding the acceptance or non-acceptance of business and its rating.
IBNR claims is the term used for claims that have not been reported to the insurer. For excess of loss
reinsurers, IBNR is an acute problem and arises from the late notification of claims to the reinsurer by
the reinsured. The reasons are:
• The reinsured itself received a late notification and this is very prevalent for latent types of claims.
• The reinsured may not have been aware of a claimant’s medical condition until a later stage of the
claim process.
• The reinsured simply undervalued the claim. This is known as incurred but not enough reported Chapter
(IBNER). 11