Managing catastrophe reinsurance claims is a big challenge for carriers. In particular, dealing with the “hours clause” can be baffling. But taking the best strategy can make a big difference in how much reinsurance a carrier will collect.
As climate change accelerates and the weather becomes more violent, catastrophe reinsurance has become increasingly complex, making modern technology a necessity for carriers to get the most value from their premiums. Ceded reinsurance has been one of the industry’s most technology-resistant areas, but that has begun to change over the last several years.
Tracking reinsurance claims in general is challenging; managing catastrophe claims is especially challenging. One problem is claims leakage. This occurs when the insurer fails to file a claim with the reinsurer because no one at the company realizes that a claim should have been filed. That might seem unlikely, but it’s not an uncommon occurrence.
Unfortunately, many insurers still use a spreadsheet to track policies and claims instead of a dedicated ceded system. Insurers that use spreadsheets must rely on staff combing through multiple spreadsheets to identify claims. Legitimate claims can fall between the cracks.
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Dealing with the “hours clause” in catastrophe claims is another complex challenge. With catastrophe reinsurance, defining the event, or catastrophe, is crucial. Under the “hours clause,” the duration of any one loss occurrence is usually limited to 72 hours. If a catastrophe’s duration exceeds the hours limit, the insurer may divide the catastrophe into two or more loss occurrences.
Consider a catastrophe that lasts 290 hours. Because it’s possible to have up to four loss occurrences for such a catastrophe, grouping individual claims becomes a complex exercise. For instance, you can have four 72-hour losses that start at hour 1 and omit all claims for hours 289 and 290. Or you can start with hour 2 and skip claims for hour 1 and hour 290. That only hints at the complexity of the challenge facing insurance companies needing to optimize reinsurance recoverables. A ceded reinsurance system with an algorithm designed to optimize for such claims can remove much of the guesswork.
How can you achieve the best solution? Reinsurance software is not a core system, but its usefulness largely depends on how tightly it is integrated with core policy administration (PAS) and claims systems. To ensure that, you’ll need to make a preliminary study before installing the software.
The study should include a detailed description of the company’s reinsurance management processes and identify potential gaps between those processes and the proposed solution. The study should also identify the contracts and financial data needed, establish interface specifications, define the data-conversion and migration strategy and gather all reporting requirements.
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Besides connecting the data in the upstream PAS to the reinsurance management system, you will need to integrate ceded reinsurance data to other applications such as the general ledger, the claims system and business-intelligence tools.
These are important details. But always remember the ultimate goal: giving the people who manage reinsurance the technology they need to do the job efficiently and effectively, especially when managing high-stakes catastrophe claims.