SWISS RE HOURS CLAUSE

We are talking about the standard Hours Clause used in CAT XL and then specifically look at how SWISS RE Hours clause is different.

We are not discussing about the 72 Hours clause used in the Property and Engineering policies in the direct market. I have my serious doubts as to how useful this Hours clause is in the direct insurance market especially when the coverage for NAT CAT perils is on full sum insured and the deductibles are very small. This aspect could be subject matter for another Blog.

Coming to the Hours Clause in CAT XL (Please note that I am not using the term 72 Hours Clause since the number of hours is different for different perils and the number of hours is negotiable), let us assume a cedant bought CAT XL for USD 180 million xs USD 20 million any one Loss Occurrence. And let us assume they had 2 reinstatements.

Most important question to answer is “What is a Loss Occurrence”?.
a) Earthquake tremors followed by aftershocks – are they all one loss occurrence or each and every tremor or aftershock a different loss occurrence?
b) A city is flooded due to heavy rainfall and the consequent failure of the drainage system. Rainfall over 30 days with intermittent breaks. Are they all one loss occurrence or they many loss occurrences?
c) Riots spread over many weeks with intermittent breaks due to police action. Are they separate loss occurrences or they all one loss occurrence? To complicate the matter, if these riots take place in many cities and towns, is riot in each city/town a different loss occurrence or all of them put together are one loss occurrence?

Why are answers to these questions important? Because:

a) N number of loss occurrences mean N deductibles to be applied (in the example-USD 20 million deductible for each loss occurrence).
b) N number of loss occurrences mean availability of more recovery depending on the number of reinstatements bought. (In above example, USD 180 million limit per occurrence and with 2 reinstatements, aggregate limit availability is USD 540 million).

The Hours clause brings in some clarity by providing a definition of when the treaty covers all damages arising out of the same insured event within a specified number of hours, even if there may be interludes when there is no activity. Please note that I used the term “Some Clarity” and not “Full Clarity”. This is because there can still be debate of what is an Event?

Swiss Re believes improved scientific techniques make it easier to define an event occurrence for reinsurance purposes. They feel the need to use the Hours clause is reduced and hence encourage their clients to use their clause wordings. Their clause too has “Hours Clause”. However, they clearly mention that this part of the clause is to be used only if the number of occurrences cannot be determined by the main clause wording used.

Blog by Atmaram Cheruvu