Chapter 10: Catastrophe Reinsurance

A set of vocabulary flashcards covering the core concepts, clauses, pricing mechanisms, and alternative risk transfer methods associated with catastrophe reinsurance as detailed in Chapter 10.

Catastrophe excess of loss reinsurance

A type of reinsurance, also called catastrophe reinsurance or catastrophe excess, that protects primary insurers from financial consequences resulting from an accumulation of losses from a single catastrophic event.

Attachment point

The amount of ultimate net loss that the primary insurer will retain in any one loss occurrence before reinsurance coverage is triggered.

Co-participation provision

A typical treaty provision requiring the primary insurer to retain a percentage of the excess loss above the attachment point to encourage sound claim handling practices.

Inuring reinsurance

Reinsurance that applies before the catastrophe treaty, thereby reducing the loss to (or inuring to the benefit of) the catastrophe treaty.

Term clause

A clause defining the duration of the treaty, which usually lasts one year and often prevents cancellation just before or after a catastrophe season.

Extended expiration provision

A provision that ensures if a treaty expires while a loss occurrence is in progress, the reinsurer indemnifies the primary insurer as if the entire occurrence happened during the treaty term.

Ultimate net loss clause

Defines what constitutes a loss, specifying that it means actual losses retained by the primary insurer after deducting other applicable reinsurance, salvage, or recoveries.

Loss occurrence clause

A clause that defines what constitutes a single catastrophe occurrence, often similar to property per risk excess of loss definitions.

Reinstatement clause

A clause that provides for an automatic restoration of the reinsurance limit after a loss, usually for an additional premium, to handle multiple occurrences in one year.

Experience rating

A pricing technique not generally used for catastrophe treaties because there is an insufficient number of losses to accurately estimate future premiums.

Exposure rating

A pricing technique used for catastrophe treaties based on trend analysis of a primary insurer’s underlying policies; often uses catastrophe modeling.

Payback period

A measure used in pricing calculated as $\text{Payback period} = \frac{\text{Reinsurance limit}}{\text{Reinsurance premium paid}}$, indicating how many years of premium it would take to fund a total loss.

Rate on line (ROL)

The mathematical inverse of the payback period calculation, expressed as a percentage: $\text{Rate on line} = \frac{\text{Reinsurance premium paid}}{\text{Reinsurance limit}}$.

Subject premium

The written or earned premium of the primary insurer used as a basis for calculating the catastrophe treaty premium.

Property residual market facility

State-formed entities (like coastal pools or FAIR plans) that provide property insurance unavailable in the voluntary market and pass on deficits to primary insurers via assessments.

FAIR plans

Fair Access to Insurance Requirements plans, originally established in the 1960s to provide insurance in urban areas where voluntary market coverage was unavailable.

Catastrophe model

A tool that combines mathematical representations of natural occurrence patterns with exposure information to provide potential loss severity and probability data.

Hazard component

The module of a catastrophe model that simulates events to determine intensity, frequency, and location based on geophysical information.

Engineering component

The module of a catastrophe model that uses hazard intensity to estimate structural damage to buildings and contents using damage functions.

Damage functions

Equations used in modeling to compute the expected level of damage to buildings and contents and estimate repair or rebuild times.

Financial component

The module of a catastrophe model that translates structural damage estimates into monetary and insured losses by applying insurance policy conditions.

Demand surge

The dramatic increase in repair costs following a catastrophe caused by supply shortages in materials or labor.

Average annual loss (AAL)

The catastrophe loss cost or pure premium representing the long-term average loss expected in any one year for the cause of loss being modeled.

Exceedance probability (EP) curve

An output of catastrophe models representing the spectrum of potential losses and the probability that a loss of a specified size will be equaled or exceeded.

Geocoding

The process of matching addresses with map positions (latitude and longitude) to perform policy-level catastrophe analysis.

Line of credit

An arrangement where a financial institution provides a prearranged loan to an insurer after a loss, providing access to capital but not transferring risk.

Catastrophe bond

A security instrument where the obligation to pay interest or principal is deferred or forgiven if the primary insurer's losses exceed a specified amount.

Special Purpose Vehicle (SPV)

An entity often used to issue catastrophe bonds or form sidecars to facilitate the securitization of insurance risk.

Catastrophe option

A financial market instrument where the seller profits if a specified level on a catastrophe index (strike price) is not reached.

Catastrophe risk exchange

A medium through which insurers exchange a portion of their concentrated risk for another insurer’s risk to achieve geographic or cause-of-loss diversification.

Industry loss warranty (ILW)

An insurance-linked security triggered when industry-wide losses from a catastrophic event exceed a predetermined threshold.

Reinsurance sidecar

A limited-existence SPV formed to provide a primary insurer with additional capacity through a quota share agreement with private investors.