What it means
Reinsurance is insurance for insurers: an insurer pays a premium to a reinsurer, which agrees to share the cost of large claims. Most reinsurance is arranged class by class, so a property treaty responds to property claims and a liability treaty responds to liability claims.
Clash cover is designed for the gap between them. The gap appears when one event hits several classes together.
A fire in a large office building can produce a property claim for the structure, a liability claim from injured visitors, and workers' compensation claims from employees, and each class may sit within its own retention (the portion the insurer keeps) while the total is painful. Clash cover responds to the accumulated total.
Most clash contracts are written on an excess of loss basis. The reinsurer pays the part of the combined loss above a retention, up to a stated limit, after recoveries from the insurer's other reinsurance have been taken off.
This is often described as the ultimate net loss, which keeps the clash layer from paying for amounts already recovered elsewhere. The contract wording carries much of the value.
It defines what counts as a single event, how many hours or days the event may last, and whether losses from more than one class must be involved before the cover responds. A loose definition can make recoveries easier, but it also raises the price.
Finance teams look at the cost through the rate on line, which is the premium divided by the limit purchased. A low rate on line signals that the reinsurer thinks a clash loss is unlikely, and a high one signals the opposite.
Reinstatement terms, which say how the cover is restored after a claim, also affect the true cost.
In practice
Real-world examples.
Example
A commercial insurer writes property, liability and employer's cover for a manufacturing district. An explosion at a chemical plant damages neighbouring factories, injures passers-by and harms workers. Its clash cover responds because three classes are involved in one event.
Example
A specialist aviation and property insurer sees a light aircraft crash into a warehouse. The aircraft hull, third-party liability and the warehouse contents all produce claims from the same incident. The finance team combines them into one clash notification for the reinsurer.
Example
The chief financial officer of a regional insurer reviews renewal quotes for a $5,000,000 clash layer. One reinsurer quotes a $250,000 premium, so the rate on line is 250,000 / 5,000,000 = 5%. She compares that price with the capital the layer saves the company from holding.
Formula
Calculation
Clash recovery = lower of (limit) and (higher of (0) and (combined net loss - retention))
An insurer suffers one event that produces a net property loss of $3,000,000, a net liability loss of $2,500,000 and a net workers' compensation loss of $1,500,000, all after other reinsurance recoveries. The combined net loss is 3,000,000 + 2,500,000 + 1,500,000 = $7,000,000. The clash cover has a $4,000,000 retention and a $5,000,000 limit. Loss above the retention = 7,000,000 - 4,000,000 = $3,000,000, which is below the $5,000,000 limit, so the recovery is $3,000,000. The insurer keeps the $4,000,000 retention.Case study
Seen in the real world.
Harbourlight Mutual is an illustrative, fictional insurer that writes small business property, public liability and employee injury policies in one coastal town. For years it bought separate treaties for each class and assumed that was enough.
When the finance director modelled a single large building fire, she found that the three classes could each stay inside their own retentions while the total landed at $6,500,000, well above what the board would accept. The company's surplus at the time was about $20,000,000, so a loss of that size on one event would have been material.
Harbourlight bought a clash layer sitting above the class treaties, with a $3,000,000 retention. The illustrative result was a cost of a few hundred thousand dollars a year in premium, in exchange for a much narrower range of outcomes for the year.
Watch out
Common mistakes.
- Assuming each class treaty already protects against a multi-class event, when each one may only respond to its own class and its own retention.
- Ignoring the event definition, such as the hours clause, which can decide whether several days of losses are treated as one event or two.
- Adding gross losses together to test the clash retention, when the contract usually measures losses net of other reinsurance recoveries.
Questions
People also ask.
How is clash cover different from catastrophe cover?
Catastrophe cover usually responds to many claims of one type from a single natural event such as a storm, while clash cover responds to a single event touching several different classes.
Who buys clash reinsurance?
Insurers that write several lines of business in the same geography or for the same clients buy it, because that is where one event is most likely to produce correlated losses.
Does clash cover pay for every multi-class loss?
No, it pays only when the combined net loss from one defined event exceeds the retention, and only up to the limit stated in the contract.
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