Non-Proportional CoversApplied

Catastrophe XoL

Q: Why does a per-risk excess of loss cover fail to respond to a hurricane?

No single claim reaches the attachment point — Per-risk covers test each claim separately. Thousands of $45,000 claims never individually breach a $5M attachment, however ruinous their total.

Per-occurrence cat cover

Protection against the accumulation of many small claims arising out of one event.

Open the interactive version → definition, quiz, structure diagram and progress tracking

Definition

Catastrophe excess of loss responds to the total of all claims from a single insured event, rather than to any one claim. A hurricane producing 4,000 individual claims of $45,000 each triggers nothing under a per-risk cover — but $180M of accumulated loss goes straight through a cat programme. Defining "one event" is therefore the contract's most consequential clause.

The hours clause defines the occurrence: typically 72 consecutive hours for windstorm and 168 for earthquake or riot, with the cedent choosing when the clock starts.
Priced from catastrophe models — exceedance probability curves, occurrence and aggregate PML — rather than from the cedent's own thin loss history.
Almost always sold with a limited number of reinstatements, because the same season can produce two events.

Worked example

A cyclone produces 4,000 claims averaging $45,000 — $180M in total. Under a $150M xs $20M cat cover the reinsurers pay $150M and the cedent retains $30M: $20M below the layer and $10M above it.

Scenario · figures in USD

When the hours clause decides the outcome

An earthquake causes $45M of loss. An aftershock 96 hours later causes a further $30M. The cover is $40M xs $10M with one reinstatement, and the treaty carries a 72-hour occurrence definition — so the two shocks cannot be combined.

Event 1 — quake, $45M	Cedent $10M · reinsurer $35M
Event 2 — aftershock, $30M	Cedent $10M · reinsurer $20M
Total recovered across two occurrences	$55M
Total retained across two occurrences	$20M
If instead treated as ONE $75M occurrence	Reinsurer capped at $40M
— cedent would retain	$35M
Cost of the second occurrence	Reinstatement premium falls due

So whatTwo occurrences cost the cedent $20M plus reinstatement premium; one occurrence would have cost it $35M. Whether the aftershock is a separate event is worth $15M, and it is decided by a clause, not by geology.

Check your understanding

A 72-hour hours clause for windstorm means:

All losses within any 72 consecutive hours may be treated as one occurrence. The clause defines the boundary of an occurrence. The cedent generally chooses when the 72-hour window starts, to maximise the loss captured in it.

Why does a per-risk excess of loss cover fail to respond to a hurricane?

No single claim reaches the attachment point. Per-risk covers test each claim separately. Thousands of $45,000 claims never individually breach a $5M attachment, however ruinous their total.

Word problem

Coastal Union holds a cat programme of $10M retention, then $40M xs $10M, then $100M xs $50M. A hurricane makes landfall on Monday morning; a second landfall from the same system occurs 80 hours later. Losses are $38M and $61M respectively. Compare the outcome under a 72-hour and a 96-hour hours clause. Ignore reinstatement premium.

Show a hint

Under 72 hours the two landfalls are separate occurrences; under 96 hours the cedent can combine them into one $99M event.

Reveal the worked answer

72-hour clause — two occurrences
Event A $38M: cedent $10M, Layer 1 pays $28M
Event B $61M: cedent $10M, Layer 1 pays $40M (full), Layer 2 pays $11M
Total recovered $79M; total retained $20M
96-hour clause — one $99M occurrence
Cedent $10M, Layer 1 pays $40M, Layer 2 pays $99M − $50M = $49M
Total recovered $89M; total retained $10M

The wider 96-hour clause recovers $10M more and halves the retention, because the cedent absorbs one retention instead of two. The trade-off is that combining also consumes limit faster and can exhaust the tower on a single event — which is why cedents with two reinstatements sometimes prefer the narrower clause.