Question ID: 2349
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Reinsurance
Article: 121-124
Status: Final
Date of submission: 22 Oct 2021
Question
It is assumed that an insurance undertaking only underwrites risks in Germany. It has an outwards reinsurance contract covering windstorm and hail only. Priority is 100,000 EUR and acceptance limit is 1,000,000 EUR. In addition, there is a free reinstatement, i.e. that a hail and/or windstorm event which exceeds the priority of 100,000 EUR will be covered up to two times a year.
According to the scenarios given in the Delegated Regulation the loss is as follows:
Windstorm Scenario A:
Event 1: 8 Mio. EUR
Event 2: 4 Mio. EUR
Windstorm Scenario B:
Event 1: 10 Mio. EUR
Event 2: 2 Mio. EUR
Hail Scenario A:
Event 1: 7 Mio. EUR
Event 2: 5 Mio. EUR
Hail Scenario B:
Event 1: 10 Mio. EUR
Event 2: 2 Mio. EUR
The question is: How does reinsurance apply?
Example 1:
Windstorm:
Scenario A
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 1 Mio. EUR Risk mitigation
Scenario B
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 1 Mio. EUR Risk mitigation
Hail:
Scenario A
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 1 Mio. EUR Risk mitigation
Scenario B
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 1 Mio. EUR Risk mitigation
Example 2:
Windstorm:
Scenario A
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 1 Mio. EUR Risk mitigation
Scenario B
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 1 Mio. EUR Risk mitigation
Hail:
Scenario A
Event 1: 0 Mio. EUR Risk mitigation
Event 2: 0 Mio. EUR Risk mitigation
Scenario B
Event 1: 0 Mio. EUR Risk mitigation
Event 2: 0 Mio. EUR Risk mitigation
Example 3:
Windstorm:
Scenario A
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 0 Mio. EUR Risk mitigation
Scenario B
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 0 Mio. EUR Risk mitigation
Hail:
Scenario A
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 0 Mio. EUR Risk mitigation
Scenario B
Event 1: 1 Mio. EUR Risk mitigation
Event 2: 0 Mio. EUR Risk mitigation
Example 4:
Windstorm:
Scenario A
Event 1: 0.5 Mio. EUR Risk mitigation
Event 2: 0.5 Mio. EUR Risk mitigation
Scenario B
Event 1: 0.5 Mio. EUR Risk mitigation
Event 2: 0.5 Mio. EUR Risk mitigation
Hail:
Scenario A
Event 1: 0.5 Mio. EUR Risk mitigation
Event 2: 0.5 Mio. EUR Risk mitigation
Scenario B
Event 1: 0.5 Mio. EUR Risk mitigation
Event 2: 0.5 Mio. EUR Risk mitigation
What is the correct interpretation?
EIOPA answer
Since all NAT Cat risks are simultaneous, in cases as the one described it is not possible to determine the right order to apply the reinsurance cover. It should be noted that there should be no double-counting of the reinstatements (Guideline 15 on the application of outward reinsurance arrangements) and their consideration in the calculation should always be in line with the terms of the contract. Therefore, in the example, overall, only 2 events should be covered, so Example 1 is not correct since it requires to cover 4 events (2 windstorm and 2 hail).
Regarding the allocation of the 2 events to be covered, both perils should benefit from the risk-mitigating effect of the cover. Therefore, Example 2 is not correct. Regarding Example 3 and Example 4, the right approach would depend on the contract. If an event combining both perils is possible and would be covered as a single event, then the allocation should be split between both perils for each event, e.g. as described in Example 4. Otherwise, only one event per peril should be covered as described in Example 3.