4 July 2017News

Brokers attempted to remove 'hours clause' in June 1 negotiations

While rates in many lines of business were again declining in the June 1 renewals, brokers also pushed for a relaxation of terms and conditions in some areas with the use of the 'hours clause' a hotly contested point on some treaties, according to sources on Bermuda.

Bermuda:Re+ILS can reveal that a number of brokers wanted to remove the hours clause in reinsurance property-catastrophe contracts as it applies to a named storm – effectively meaning that a big storm can be classed as one event if it makes landfall several times.

For cedants this would be good since they only pay the retention once; for reinsurers it would be bad since total losses would likely be bigger.

The impetus for the renegotiation of this clause was Hurricane Matthew, the Category 5 hurricane that hit parts of South America, the Caribbean and the US in 2016. Over the period of a week, that storm made landfall several times, variously weakening and then intensifying as it moved.

Hurricane Matthew resulted in insured losses of around $5 billion and economic losses of around $15 billion. The type of hours clause – or lack of one – used in a treaty would have a great bearing on the size of the loss bourn by reinsurers in the aftermath of such an event.

One source said that Bermuda had, in fact, been more open to removing the hours clause than carriers in the London Market. “You can see what the London Market has rejected in terms of wordings and it does look as if some carriers there are taking a tougher stance,” the source said.

One suggested wording gives “the illusion” of an hours clause, the source said, by dictating that the insured event ends some four days after the last official hurricane warning.

“The issue is that brokers have to look as if they have achieved something – rates don’t have much further to go so it is about finding something in the form of bells and whistles,” the source said.

The pressure on terms and conditions in policies comes as brokers report further rate reductions in the recent June 1 renewals. Studies from JLT Re and Willis Re have both indicated significant falls with JLT suggesting that the reinsurance rate decline accelerated in the 1 June 2017 renewal, falling for the sixth consecutive year.