Second Event Cover

What is 'Second Event Cover'

A second event cover is a term used in the insurance industry that refers to a clause in a reinsurance treaty regarding multiple occurrences of the same peril.  

BREAKING DOWN 'Second Event Cover'

A second event cover is most commonly found in catastrophe insurance. The second event cover, as a clause, reduces the amount of loss a ceding insurer will retain on subsequent occurrences of a peril during a given period of time. In the insurance industry, an insurance company can pass off part or all of the risks associated with an insurance policy portfolio to a reinsurance firm. Passing off risk in this manner allows the ceding company to hedge against undesired exposure to loss and frees up capital to use in writing new insurance contracts.

When underwriting a new policy, insurers examine both the potential frequency, meaning how often a claim is filed, and the severity or 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 or natural disasters.

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 on 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.

When Would One Need a 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.