We had seen from the A.M. BEST analysis of Insurance Company failures that 8% of all failures were due to Catastrophic Losses. Catastrophic losses can lead to failures if :
a) Not enough CAT XL has been bought.
b) Accumulation in a particular Cresta Zone has not been properly managed.
What we have to remember is that we have to know at any particular time, the live exposures in our books in each of the Cresta Zones. And the exposure is not only in respect of the Gross exposures but also the net exposures. If we need to know the net exposures, the reinsurance cannot be on excel sheets. It needs to be in the system.
Reinsurance based on system is a necessary condition but not a sufficient condition. System has to have built in checks and balances. For example, Cresta Zone has to be compulsory input before the system allows further data entry. Is this control in system enough? One insurer put a requirement that Pin code (Zip code) is a compulsory field. When report was run, it was seen that the maximum exposure was in a non-existing Zip-code 999999.
Which tells us that data entry personnel have to be trained on the importance of correct zip code. The training has to be also on how the multi-location policy data will be entered, how the floater policy data will be entered, how the Gross Profit figure in Loss of Profits policy will be split across various locations?
Bigger issue is how to manage accumulations due to contingent business interruption coverages?
Impact of large number of addon coverages and clauses also needs to be considered while monitoring accumulation.
Setting accumulation limits for each Cresta Zones is an art. Sometimes, CAT XL puts those limits. But many times, the insurers themselves have to identify the limits. CAT Modelling reports can be a good source to guide insurers.
When there is a likely breach, who is authorised to approve granting additional CAT limits for a Cresta Zone? What are the parameters based on which such approvals are granted?
To summarize, Accumulation monitoring is one the important roles of any underwriter.
Blog by Atmaram Cheruvu
