Clash Reinsurance

Clash Reinsurance

Investopedia / NoNo Flores

What Is Clash Reinsurance?

Clash reinsurance is a type of extended reinsurance coverage that protects a primary insurer from excessive loss claims on a single event. There can be several scenarios in which clashes may result in excessive claims after a single coverable event. Clash reinsurance may apply to natural disasters or financial and corporate disasters.​​​​​​​

Primary insurance companies purchase clash reinsurance for their security. Ceded reinsurers may also only take a proportional amount of the clash coverage risk, requiring a primary insurer to deal with several ceded reinsurers in order to get the coverage they desire. Clash reinsurance coverage reduces the maximum potential payout for an insurer if a single event leads to claims in excess of a specified level.

Key Takeaways

  • Clash reinsurance is a type of reinsurance coverage protecting an insurer from excessive claims on a single event.
  • There can be several scenarios in which clashes may result in excessive claims after a single coverable event.
  • Clash reinsurance is commonly utilized for mitigating excessive payouts from the occurrences of natural disasters, financial disaster, and corporate disasters.​​​​​​​

Clash Reinsurance Explained

Reinsurance is a corporate business involving companies that reinsure insurers in order to limit or diversify some of the risks that arise from insurance policy claims. There can be a few different scenarios in which clash reinsurance may be applied. Comprehensively, clash reinsurance involves a great deal of documentation as well as liability management in order to execute appropriately.

Clash reinsurance builds on the basic premises of reinsurance, which allow a primary insurer to set limits for their own obligations. Reinsurers step in to insure a primary insurer after a specific threshold has been met.

Clash Scenarios

There can be two distinctly different types of clash reinsurance scenarios. Commonly clash reinsurance will involve multiple claims of the same kind from a single event. However, clash reinsurance can also be sought when a primary insurer agrees to insure a client from multiple angles associated with a single event.

An insurance company may seek out clash coverage from a reinsurer if one single coverable event could result in two or more claims to the primary insurer from multiple insured policyholders. For example, a primary insurer may use clash reinsurance when approving multiple property and casualty policies for multiple policyholders against hurricane damage in a geographic area where hurricanes are very likely.

Other catastrophic events where multiple claims might occur for an insurer from multiple policyholders could also include flooding, fire, or earthquake coverage. If a geographic area is at a high risk of any particular natural disaster under coverage, and the insurer approves multiple policyholders in that area, then clash reinsurance to help cover claims over a specified threshold could be a good risk management strategy.

Beyond just multiple claims from multiple policyholders, clash reinsurance may also involve scenarios in which a single policyholder can make multiple claims on a single event which may lead to an excessively high payout from a primary insurer.

Situations like this might involve coverage for executive directors when both director and officer compensation clauses as well as errors and omissions compensation clauses are both in force. If a single individual can reap the benefits of multiple claims from a single event and this is in effect for multiple parties under an insured umbrella then the risks are very high for a primary insurer and thus the need for clash reinsurance also becomes higher.

Mitigation of Risk Through Clash Reinsurance

Reinsurance is insurance for insurers or stop-loss insurance for these providers. Through this process, a company may spread the risk of underwriting policies by assigning claim payouts to other insurance companies. The primary company, which originally wrote the policy, is the ceding company. A second company, which assumes the risk, is a ceding reinsurer.

In some cases, there may be multiple ceding reinsurers. The reinsurer(s) receives a prorated share of the premiums. Reinsurers will usually take on losses above a specified threshold. However, reinsurance contracts may also be structured so that the reinsurer takes on a designated percentage of claim losses.

Overall, the use of reinsurance, and clash reinsurance specifically, is a part of a risk management strategy. Primary insurers can more accurately target maximum liabilities while also reaping the greatest profits from policy premiums when they use clash reinsurance. With clash reinsurance, the insurer pays a small premium to a reinsurance company for the assurance that liabilities will not exceed a target level and become impossible to repay at all or repay with any profits. These efforts help to prevent unbearable losses or even bankruptcy, specifically when massive calamity occurs.

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