Restrictive condition on ERX financial resource for reinsurance
HI Graham,
Just wanted to ask a clarifying question on this:
when including non-cat reinsurance must consider 'per event' limits and other events that may exhaust coverage
Does non-cat reinsurance cover earthquake at all? What is the point of putting a limit on non-CAT events here?
Thanks,
Tony
Comments
Hi Tony,
The details of cat reinsurance are not covered in the syllabus reading so there isn't too much I can say about it.
The specific coverage for non-cat reinsurance depends on how the reinsurance contract is written but it likely would not cover an earthquake catastrophe. If it does have some sort of earthquake coverage, the reinsurer would put a limit on coverage for the same reason any insurance policy has an upper limit - to protect against having to pay out an excessive amount.
The reason the primary insurer has to consider "per-event" limits (and maybe other conditions that limit coverage) is that the primary insurer has to know how much compensation it can potentially receive from the reinsurer. This is all part of the primary insurer making sure they have sufficient resources to cover earthquake claims. If "per-event" limits are too low then the primary insurer may have to find other financial resources.
This came up in the exam problem below and it's just one of those things you have to memorize. The whole point is that you can't just buy a reinsurance policy (whether it's cat or non-cat) and just assume you're protected. You have to also carefully consider the wording of the reinsurance policy to make sure it really is providing the coverage you need.
Very well explained, thanks Graham!
You're welcome Tony!