One of the very common Long-term non-life policies are Project Insurance. Engineering underwriters are very comfortable with giving long term policies but are uncomfortable with Long-tail claims. Hence, they give a small sub-limit for the Third-Party Liability sections in EAR/CAR.

For many insured’s such small limits are inadequate. Hence, they approach the liability underwriters for stand-alone third party/public liability insurance for the project. Liability underwriters are very comfortable with long tail claims but are very uncomfortable with long term policies (except for the few who are used to giving Single Project PI). So, they are ready to give annually renewable third-party liability policy. Does such an arrangement meet the insured’s requirement?

It normally does not. Any major third-party liability claim during the project period could make the renewal economically unviable or even sometimes difficult to get the renewal quote itself.

Let’s extrapolate this same situation to reinsurance. Let’s assume a cedant has a large concentration of long-term home mortgage policies and Project Insurance. And the CAT XL is to be bought annually. How do the exposures grow year after year? What will be the impact on the limits to be bought every succeeding year? And what will be the impact if there is a major event in one particular year and the reinsurance capacity dries out or reinsurance costs increases dis-proportionately?

Think about the situation-premium already fixed on direct polices but future reinsurance costs unpredictable.

Blog by Atmaram Cheruvu