4

Outline

Casualty Excess of Loss Treaty Reinsurance

PURPOSES                                                                                  127
TYPES OF CASUALTY REINSURANCE CONTRACTS     128
     Quota Share
     Per Risk Per Occurrence (Working Cover)
     Per Occurrence (Catastrophe, Contingency, or Clash)
     Aggregate Excess (Stop Loss)
CONSIDERATIONS IN USING CASUALTY EXCESS        137
     1. Lines of Insurance Affected and Reinsurance Desired

    2. Ultimate Net Loss and Expenses
          Allocated Loss Adjustment Expense
          Loss in Excess of Policy Limits (XPL), Extra Contractual
               Obligations (ECO), and Punitive Damages
     3. Integration of Other Reinsurances; Net Retained Line

     4. Methods of Attachment and Termination
     5. Retention and Limit

     6. Definition of Occurrence and Loss Triggers
     7. Event Coverage or Interlocking
     8. Aggregate Extension and Aggregate Extraction
     9. Pricing Tools

          Balance
          Pricing Factors: Expenses, Margin, Losses
               Loss Development and IBNR
               Inflation and Loss Trending
          Rating Plans and Approaches
    10. Ancillary Issues
               Structured Settlements
               Treaty Special Acceptances
               Loss Notice Requirements
               Errors and Omissions
               Loss Settlement Discretion (Follow the Fortunes)
EVALUATIONS AND CONTRIBUTIONS                            195

     Reinsurer
     Insurer (or Reinsured)
     Financial Condition: Reinsurer and Reinsured
SUMMARY                                                                                199

4

Casualty Excess of Loss Treaty Reinsurance

by Richard M. Shaw *

     Casualty excess of loss treaty reinsurance is one of the most difficult areas in which the reinsurer and the insurer strive to reach a mutually satisfactory arrangement. The United States is perhaps unique in having a legal and social climate that makes predictions of future losses in the casualty area nearly impossible. However, the valuation of those losses is done in a market where the two parties in reinsurance have maximum competitive freedom in reaching suitable terms and conditions.

     Of the six major elements of the primary insurance business (fire, marine, casualty, suretyship, life, health), the reinsuring of casualty insurance is perhaps the newest because casualty insurance itself is new. Only in recent decades have negligence claims and lawsuits increased rapidly, resulting in liabilities imposed on those who caused losses to others. In fact, many within the industry prefer the term, liability insurance, in describing casualty insurance. Fire and marine insurance reimburse insureds for losses caused by specified perils (fire, windstorm, explosion, among others). Casualty (or liability) insurance reimburses (third parties usually) for losses caused by the broader peril of negligence or alleged negligence within a society that perceives itself as entitled to a free lunch. The three largest sources of casualty . . .


· Assistant Vice President and Associate General Counsel, RELIANCE INSURANCE COMPANY, 4 Penn Center Plaza, Philadelphia PA 19103. An autobiography follows this chapter, which draws from the original entitled The Excess of Loss Treaty in Casualty Insurance by LeRoy Simon, published in the 1980 edition of this book, and the chapter entitled Casualty Excess of Loss by this author, published in Reinsurance Contract Wording, 1992, and contains substantial portions of both chapters in an effort to consolidate and update the thoughts presented. This author benefited extensively from the expertise and kind assistance of Paul Ingrey, Chairman, F&G RE, INC., of Morristown NJ, Robert E. Evans, Senior Vice President and General Manager, ALLMERICA RE, A Division of The Hanover Insurance Co., of Florham Park NJ, George H. Roberts, President, and Jon Ingersoll, Edward Stanco, Robert Miccolis, and Arthur Mella, Senior Vice Presidents of RELIANCE REINSURANCE CORP., for technical assistance in writing this chapter. Deborah Cohen of PEPPER, HAMILTON & SCHEETZ in Philadelphia graciously provided independent legal review.

[Home Page] [The Editor] [The Books] [The Book Flyer] [The Order Form]