Second Event Cover
What is 'Second Event Cover'
A clause in a reinsurance treaty that reduces the amount of loss a ceding insurer will retain on subsequent occurrences of a peril during a given period of time. Second event covers are designed to reduce risk exposure for perils that may occur multiple times, and are most commonly found in catastrophe insurance.
BREAKING DOWN 'Second Event Cover'
When underwriting a new policy, insurers examine the potential frequency (how often a claim is filed) and severity (how big of a loss the claim brings) for a particular peril. In some cases, such as with auto insurance, the severity may be low but the frequency high. In most cases insurers are able to handle these types of claims because they are not very expensive and are easy to predict. Insurers have a more difficult time handling claims that are high severity/low frequency, such as those stemming from a catastrophe.
Insurers often look to the reinsurance market to reduce their liabilities in the case of a catastrophe. These agreements are often structured into layers with different attachment points based off of loss retention. Each subsequent layer provides cascading excess of loss coverage over the preceding layer, so the fourth layer will only come into effect if the aggregate losses on the third layer are exhausted. This aggregate coverage is purchased for a single event, and insurers looking to have subsequent events covered will need to purchase a dedicated second event cover.
Second event covers are designed to cover subsequent events, and have their own aggregate contract limits. They cover a fixed percentage of a second event, such as a second flood occurring in the same year, and another fixed percentage for all subsequent events.
Pricing second event covers can be difficult, as some catastrophes may cluster and the probability of a second event occurring soon after a first event may be considered high. For example, a flood that occurs in June may be closely followed by a flood in July because the ground is saturated and river banks damaged.