We all heard of CAT XL. It is an excellent risk management tool for managing the CAT exposures of Direct Insurers.
Usually, the attachment point of a CAT XL is high. Let’s assume that for an insurer, the attachment point for CAT XL is USD 5 million. Let their CAT XL structure be : USD 195 million xs USD 5 million. Of course, it will be layered. We are not getting into layering.
In a large Country like India, it will not be unusual if in one financial year, we have floods in Mumbai, Delhi, Bengaluru, Chennai and Ahmedabad. And we have an Earthquake in Himachal and a cyclone in Andhra Pradesh.
Let us assume the net loss of the insurer after recoveries from Proportional Treaties and Risk XL; in each of the flood events is USD 4 million. Hence, there will be no recovery from CAT XL.
Let’s assume the net loss in Earthquake is USD 45 m. Hence, recovery from CAT XL will be USD 40 m.
Let’s assume the net loss in Cyclone is USD 20 m. Hence, recovery from CAT XL willbe USD 15 m.
If we calculate the total net loss of the insurer, just from NAT CAT events, it will be = USD 4 m * 5 + USD 5 m + USD 5 m = USD 30 m.
This can destroy the net loss ratio for that particular year.
A good product to protect from such eventuality is the CAT AGGREGATE EXCESS OF LOSS.
Blog by Atmaram Cheruvu
