While common practice in other parts of the world, this is a new trend for the UK Alex Denslow and Neil Beighton, both of CMS, discuss the arising challenges
To what extent would a direct insurer be entitled to aggregate claims arising from more than one named storm, and shift a greater share of its claims to the excess of loss market?
This is a question being asked of reinsurers covering the UK direct market after a winter of terrible weather. The Met Office began naming storms for the first time in 2015 and the recent devastation caused by Desmond, Eva and Frank has already resulted in widespread damage, before Gertrude then made landfall on 26th January. The naming of storms brings into focus issues that have previously been thought of as more relevant to natural disasters in other parts of the world.
The English Courts have traditionally determined questions of reinsurance policy coverage on the basis of a careful scrutiny of the language of the reinsurance contract, and therefore the answers to most of these points will lie in the precise words adopted.
Reports suggest that most UK exposures have been retained by direct carriers, with limited claims hitting excess layers. But recent trends by reinsurers to relax their terms and conditions could mean language for storm and flood in the UK could permit aggregation in a wider range of scenarios.
Usually, a single storm will be regarded as an event, but if more than one storm contributes to flooding the relevant event may be less clear.
Therefore, most event definitions are modified by “hours” clauses, specifying that all loss or damage occurring within a specific period of time should aggregate as a single loss. For flood losses, an hours clause will typically specify 168 hours (i.e. 7 days).
Of course, flood losses may last beyond a week and be contributed to by more than one named storm. Some event clauses refer specifically to high water marks and specifically address the situation where flood levels recede but then peak again. Increasingly, hours clauses for flooding are being extended to 504 hours (i.e. 21 days), allowing greater scope for aggregation.
It can also be a challenge to pinpoint which event was causative of a particular loss or losses. For example, buildings may have been damaged initially by wind and rain and then by swollen rivers, contributed to by each of the named storms, progressively washing away foundations until a building collapses. Whether the damage can be said to have been caused by any of the named storms or by the flooding alone will depend on the terms of both the direct policy and the reinsurance.
Another feature of these winter storms is that they will straddle two annual periods for any reinsurances renewed at 1st January 2016.
Because the Atlantic hurricane season is generally accepted as running from June to November the question of losses crossing from one annual period to the next rarely arises.
In some ways, the pattern is more comparable with the New Zealand earthquakes in 2010 and 2011. In that case, the market generally treated the major earthquakes as four separate events, but for reinsurances with less standard aggregation provisions and Extended Expiration clauses in respect of losses in progress, it was possible to argue that a single loss event had started in 2010 and was still ongoing in 2011.
The quartet of winter storms that hit the UK in December and January have underlined the importance for insurers of understanding their exposures, and whether the aggregation wording in their treaties permits losses to be ceded to reinsurers. Reinsurers should conduct a thorough review of their wordings to ensure they fully understand the losses that will be passed on by their cedants.