Normally CAT XL is bought on a Loss Occurring During (LOD) basis.
Let’s discuss the impact if a cedant decides to buy a CAT XL on a RAD basis.
2024: CAT XL : USD 450 m xs USD 50 m.
2025: CAT XL: USD 500 m xs USD 100 m.
Let;s assume there is a major earthquake in May 2025 and the total net loss of the cedant is USD 200 m. Let’s assume that USD 90 m losses pertain to risks attaching in 2024 and USD 110 m losses pertain to risks attaching in 2025.
The recovery will be as follows:
2024 CAT XL Treaty: USD 40m
2025 CAT XL Treaty: USD 10m.
Total loss to net account of cedant = USD 50 m + USD 100 m = USD 150 m.
Total recovery for the event = USD 50 m.
INTERLOCKING CLAUSE
If an Interlocking Clause is attached to both the treaties, then, the attachment point as well as Limits get proportionately changed. The formulas being
(Attachment point * Loss amount for the year)/(Total Loss for the event).
(Limit * Loss amount for the year)/(Total loss for the event)
Revised attachment point and limit for 2024 (for this event) will be:
Attachment Point: USD 50 m *90m/200m = USD 22.5 m.
Limit for 2024: USD 450 m * 90 m/200 m = USD 202.5 m.
Recovery for 2024 = USD 90 m – USD 22.5 m = USD 67.5 m.
Revised attachment point and limit for 2025 (for this event) will be:
Attachment Point: USD 100 m *110m/200m = USD 55 m.
Limit for 2025: USD 500 m * 110 m/200 m = USD 275 m.
Recovery for 2025 = USD 110 m – USD 55 m = USD 55 m.
Total recovery has improved to USD 122.5 m compared to USD 50 m without a interlocking clause.
Simlarly, loss to net account has reduced to USD 77.5 m compared to USD 150 m without interlocking clause.
Blog by Atmaram Cheruvu
