A cedant (large insurer in a large market) bought a Liability XOL covering CGL, WC, D&O, E&O, Crime, etc.

It bought cover USD 19 m xs USD 1 m Ultimate Net Loss on all acceptances (across all classes) from any one claim / loss. This was split into five layers.

“Any one Claim” has been defined as:

The term “any one claim” shall be as defined in the original policy and, if not so defined, shall mean an accident, incident, disaster, casualty, error, omission, wrongful act or happening, or series of accidents, incidents, disasters, casualties, errors, omissions, wrongful acts or happenings arising out of one event.

It did not buy any proportional reinsurance. Original policies maximum limits were between USD 5 m and USD 20 m depending on product.

Let’s assume the following incident: A chemical reactor in a Bulk Drug unit exploded causing death of 10 workers and the resultant toxic release led to death of 30 third parties and explosion damaged the neighboring factory. It was a listed company and shareholder action led to D&O claim.

Is above incident an unlikely event? We can further enlarge this event by assuming there is a reactor defect, and the manufacturer of the reactor was also insured with the same cedant for product liability and recall. And if another insured suffers a similar explosion after few months and is insured with same insurer, it also could come under the same occurrence.

Liability reinsurance can be bought either on “Per Policy Excess of Loss Reinsurance” or “Per Occurrence Excess of Loss Reinsurance”. It can be bought separately for each product or combined for all products. Or Public, Product, CGL can have one treaty and D&O, E&O, etc another treaty.

If bought on per policy, cedant would suffer many deductibles. If bought on per occurrence, limits may not be sufficient.

Key is careful analysis to understand what is most suitable for a particular cedant based on their underwriting appetite.

And finally the decision whether a “Clash Cover” is needed.

Blog by Atmaram Cheruvu