REVERSE TWO RISK WARRANTY

Have you ever seen a reverse two risk warranty in a Risk XL? I have never seen any RISK XL contract with a reverse two risk warranty.
I have always believed it is in the best interest of the reinsured to have a reverse two risk warranty in Risk XL. I used to try to convince the cedants to agree to introduce the reverse two risk warranty in Risk XL with the following reasoning:

1) Why do you want to burn your risk XL layers including the reinstatements in case of a large NAT CAT event?
2) CAT XL is large enough to take the NAT CAT losses even if the risk XL does not inure to the benefit of CAT XL.
3) If you burn your RISK XL midway through your treaty period, you will have to pay heavily to again buy the same.
4) Most layers (other than PML error layer) are experience priced. If you burn your Risk XL, your premium for next year will dramatically increase.

Cedants used to ask me-If I agree to introduce the reverse two risk warranty, do I get a discount in my premium? My answer would be it would depend on the NAT CAT activity in the last few years. If not much activity and losses, you may not get much discount.
The second question they used to ask me is whether we need to buy larger limit for CAT XL? My reply used to be that CAT modelling considers the inuring impact to proportional treaties but normally does not consider the inuring impact of Risk XL and hence there will not be any requirement of larger CAT XL limit. There are many readers of MOI blogs who are CAT Modelers, and I would request them to correct me if I am wrong.
As long as I was a reinsurer and used to advice a reverse two risk warranty, while no cedant ever told me on my face, I got a feeling that they felt that I had a vested interest in recommending it. They thought I wanted to improve the results of the Risk XL. The truth was since we were mostly a
Non-Proportional player and participated both in RISK XL and CAT XL, we would have anyway paid under CAT XL these losses and hence no real advantage as a reinsurer.
Was there absolutely no vested interest? There was some. CAT aggregates were consumed if Risk XL covered NAT CAT events and since there was strict limit on these aggregates, having reverse two risk warranty would free up these aggregates and allow us to write more business in the NAT CAT peak Zones.
I have never succeeded in convincing any cedant on reverse two risk warranty. For last many years, I am neither an insurer or a reinsurer and hence have no vested interest. I still try to convince cedants that it is in their best interest to protect RISK XL for large fire and explosion losses rather than consuming it for large event losses. Have I been able to convince any cedant? Answer is again NO.
Be it a Swing rated layer or getting RISK XL trigger for NAT CAT claims, if they have been existing for many years, it is not easy for a decision maker to remove the same.

Change is difficult, Staus Quo is easy.

Blog by Atmaram Cheruvu