Reinsurance

Since the term ‘systemic risk’ was more widely adopted in the insurance market a decade or so ago, awareness of unmanageable exposures has grown considerably. The market has long been wary of specific issues, such as risk accumulation and exposure to war risk. More recently, there has been a growing appreciation that systemic risks have multiplied and grown in complexity. Insurers that write across a wide range of classes may be exposed to 40 or 50 different systemic risks. Understandably, this is a recurring theme in the Prudential Regulation Authority’s Dear CEO letters, rightly reflecting the regulator’s priorities. We anticipate this trend will accelerate and insurers will need to conduct broad audits of their policy exposures and the suitability of their reinsurance protections.

We have in the last year been asked by several insurers to ensure their policy wordings for property risks align appropriately with their protections with Pool Re. Ensuring cover is back-to-back with reinsurance is challenging, as the law reports attest. The safest course is to adopt identical language in both policies and reinsurance contracts (and comparable dispute resolution clauses). This is challenging in relation to Pool Re, where the parameters of the cover are set out in an underwriting manual and reflect terms prevalent in the 1990s. As Pool Re reviews its business model we should welcome focus on introducing flexibility and updated terms to relieve some the tension that currently arises.

Reinsurers will keenly watch any appeal in relation to the meaning of “occurrence” in the context of the government response to COVID-19, following the recent decision in Stonegate and related cases. This follows the most recent analysis of aggregation and is important in the context of COVID business interruption losses. It is likely however that there will be differences of opinion about the application of that analysis at the reinsurance level as many cedants will have made claims based on aggregation around the outbreak of COVID in a country or the initial reaction of the relevant authorities to it and suggested that a broad concept of aggregation should apply whereas reinsurers may take the view that the more restricted approach in Stonegate and other cases should apply at both the insurance and reinsurance level. Much may turn on the precise language of the aggregation provisions and there may be a need to consider amendments to the language in future to ensure clarity and that there is no gap between the position of the cedant and the reinsurer.