What is Clash Reinsurance
Clash reinsurance is an additional type of extended reinsurance coverage which protects a primary or ceding insurance company. An insurance company will need clash coverage in the event one casualty loss event results in two or more claims to the primary insurer from insured policyholders. Primary insurance companies purchase clash reinsurance for their security. It reduces the maximum potential loss on either a single risk or a large number of risks. Clash reinsurance may apply to natural events or financial and corporate disasters.
BREAKING DOWN Clash Reinsurance
Clash reinsurance extends the coverage from normal reinsurance recoveries when an insurance company faces two or more claims from multiple insured policyholders following a catastrophic event, such as a hurricane, flood, fire or earthquake. Clash insurance is intended to protect the insurer when numerous claims arise from an out-of-the-ordinary event. Clash coverage allows an insurance company to share substantial risks, and the accompanying substantial loss, with other companies.
While events which could be considered clash events are unlikely to occur when they do happen, the resulting claims could overwhelm the primary insurance company if it does not get reimbursement for all the claims it pays out. The central issue when writing a clash reinsurance policy is the definition of the term clash. Three criteria define a clash situation.
- Multiple claims from multiple policyholders or one policyholder with multiple policies
- A situation in which all the claims result from one event
- The losses take place in a specific, limited period
Traditionally, clash reinsurance has applied to calamities which are natural events, such as wildfires, hurricanes, and earthquakes. However, in the last few decades, primary insurers have sought clash reinsurance for financial calamities such as the savings and loan crisis of the 1970s, the 2001 Enron collapse, and the subprime mortgage industry crash of 2008.
Mitigation of Risk Through Class 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 them to other insurance companies. The primary company, who originally wrote the policy, is the ceding company. The second company, who assumes the risk, is the reinsurer. The reinsurer receives a prorated share of the premiums. They will either take on a percentage of the claim losses or take on losses above a specific amount.
Typical reinsurance often has a cap on reimbursements for a single event to the primary insurer. For ordinary situations, this cap is much larger than the primary insurer should need. But, for an unusually large or calamitous event, such as a hurricane or other catastrophe, the primary insurer may need to pay claims to numerous policyholders. This enormous number of claims will exceed the reinsurance cap and could cause the insurer to go bankrupt.
Clash reinsurance provides a specific safety net to warrant that the primary insurer can safely cover all the claims it pays out, even in the case of a massive calamity. Clash reinsurance is more costly for the primary insurance company, but it can prevent unbearable loss or even bankruptcy which would result from a typical capped reinsurance policy.