Reinsurers must remove escalation clauses for certainty of cover: Howden’s Warne

Reinsurers must remove all forms of Middle East escalation clauses to provide certainty of cover and allow the primary market to confidently write business, according to Howden Re’s global head of terrorism and political violence (PVT), Sandy Warne.

The war and PVT specialist said that escalation clauses – which were placed into certain specialty treaties at 1 January 2024 renewals – are not fit for purpose in their current form.

“You have to take out any form of escalation clauses because they aren't defined. At the moment, how can you be given certainty of cover to a client if you have an escalation clause that's not defined?”

Warne pointed towards a number of Middle East events that could have constituted an escalation over the past 12 months. Not least Iran’s firing of hundreds of missiles into Israel in April 2024.

“We had a situation where you had 300 missiles and rockets being fired into Israel. Is that an escalation in terms of definition?” queried Warne.

Her criticisms on definition focused on the broad discretion given to reinsurers around the clause’s trigger.

Wordings give the lead reinsurer the option of triggering the clause if, in their “reasonable opinion”, there has been war, invasion, acts of foreign enemies or acts of hostilities between Israel and the named territories.

“Where there's so much uncertainty, you want the direct markets to be able to write with the confidence that they have got their back-to-back cover. At the movement there’s a big disconnect as they don’t have that.”

Earlier this month, The Insurer reported that reinsurance brokers have been looking to remove or clarify the language around Middle East conflict escalation clauses, particularly that inserted by Swiss Re.

Reinsurance market sources said that discussions have also focused on the streamlining of the named territories list to only include Israel and the named territories of Iran, Lebanon and Yemen.

Disconnect between instability and losses

Warne said the upcoming renewals will be particularly interesting as the near unprecedented geopolitical instability, at least by 21st century standards, has been combined with limited PVT losses.

She pointed towards the New Caledonia riots, which she said had seen insured losses “well in excess” of the original ~$1bn estimate. However, these insured losses have been shouldered by the property treaty market, not the PVT space.

This has seen certain sections of the property market attempt to exclude PVT while others look to impose further restrictions around event definitions.

“The biggest challenge to the market right now is going to be the dislocation between inwards and outwards in terms of what the direct market is giving, and what's available at the back end in terms of the reinsurance,” said Warne.

This disconnect not only related to the relationship between the PVT and property market, but also through what Warne described as “silent cover”. This is where the perils are included in marine or other specialty cover and not being captured in the pricing.

“Death by 1,000 cuts” – Horizontal aggregation

Warne also expressed concerns that the vertical nature of current PVT placements had caused significant horizontal net exposure.

This has seen multiple events where insurers have paid out on a net basis in each and every location for one single event trigger.

“You are not getting that sideways reinstatement and/or the exclusionary language has become so restrictive that it is now becoming like a death by 1,000 cuts,” said Warne.

Howden previously warned that the market was one catastrophe away from “ complete dislocation” if restrictions persisted.

As a result, Warne said there was greater interest in more “ground-up protection”, with quota-share arrangements or the use of parametric products both seen as plausible solutions.

Please note this interview with Warne occurred prior to the recent escalation between Israel and Lebanon-based Hezbollah following a pager attack on 17 and 18 September.