Soft Markets Lead To Hard Times....

Author:Mr David Abbott and Julie Tripp
Profession:Clyde & Co

On 29 August 2005 Hurricane Katrina made landfall on the Louisiana coastline. Just shy of one month later, Hurricane Rita tore across southern Florida, hitting the Texas-Louisiana border after crossing the Gulf of Mexico. About one month after that Hurricane Wilma, the most intense tropical storm on record in the Atlantic basin, ripped across the Gulf in the opposite direction, devastating parts of the Caribbean, Mexico and Florida. This 3-storm combination resulted in one of the most widespread loss recovery situations the US property/casualty market had ever seen. Even with the collegiate spirit and robust wordings in the market there were issues, particularly with business interruption. Some companies are still dealing with claims a decade later.

Astonishingly there has been only one major hurricane landfall in the US in the last eight years, despite a number forecasts to the contrary during that period. This year, the US National Hurricane Centre has forecast a "below-average" hurricane season for 2015. This low in North American hurricane activity has been a key factor in the recent softening of market conditions. Indeed, general property market conditions are the softest they have been since before 2000. Unfortunately, with soft markets can come soft drafting.

Industry Loss Warranties - the simple choice?

One type of cover taking centre stage at the 1 January renewals was the Industry Loss Warranty (ILW). ILWs, developed in the 1980s, have been on the increase since Superstorm Sandy in 2012. These covers are designed to respond once a loss has hit a certain threshold on an industry-wide basis. They usually nominate a specific organisation's reported figure to be the benchmark - for example Property Claims Services (PCS), Swiss Re's sigma or Munich Re's NatCAT service.

It is essential to draft these types of wordings tightly, however, as pitfalls abound. The most common relate to the suitability of the nominated index. For example, where an ILW's trigger is phrased as "non-marine property losses arising in North America" in excess of GBP 5 billion following a named windstorm, it would be prudent to nominate a publication that provides its estimates based on non-marine property only (some publications do not differentiate between marine and non-marine property in compiling their indices). If the trigger specifies a geographical region, it is important to ensure the publication nominated also covers that region, and not just a subset.


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