Hours clause questions raised over California wildfire reinsurance claims

Questions related to the hours clause are being raised with respect to the recent California wildfires, as some cedants look to the possibility of claiming more than once on their reinsurance or retrocession protection, Artemis has learned.

The hours clause specifies the duration an event can be considered as a single loss and if the catastrophe or loss event duration extends beyond that, it can, in some cases, be considered two losses, and in extreme cases enable a cedant to claim a second reinsurance recovery.

It can also enable a re/insurer to claims on its reinsurance or retro for multiple events under a single retention, if the hours clause in the contract is long enough to encapsulate two events such as a storm.

Conversely, shorter hours clauses can mean an event that extends beyond it can be claimed for twice, in certain cases where the terms have not been defined tightly enough to explicitly say what constitutes one loss event or two.

Both of these cases can result in more losses being passed onto reinsurance and ILS players, through larger or multiple claims.

The hours clause has for some perils been expanded dramatically, as a result of the softening of reinsurance and the expansion of contract terms, meaning it now presents more of a threat to reinsurers than ever before, in terms of bundling multiple events under one retention, but we’re told these recent California wildfires could see the hours clause become relevant for a handful of cedants in terms of multiple claim attempts.

The average hours clause for reinsurance contracts was typically 168 hours (7 days), but many have now had these terms extended in some cases to as long as 504 hours (21 days).

It depends on the peril involved, the cedant and the markets as to whether hours clauses have extended and in many cases they do remain 168 hours, especially for perils that have been considered secondary such as wildfires.

With the two recent California wildfires, the Camp fire outbreak began on November 8th and full containment was only achieved on the 25th, so this event lasted well over the 7 day minimum that hours clauses are typically set at. The Woolsey wildfire outbreak began on November 8th as well and this fire was contained on the 21st, so again the duration of the event was longer than standard hours clause terms.

Our sources said that there are a handful of cedants that are beginning to raise questions over whether they can claim more than once on their reinsurance protection for the wildfires, due to the events extending beyond their hours clause terms.

If it turns out they can push either of the fires as two separate loss events, it could enable them to claim twice on their limit and we’re hearing that those cedants enquiring about this are likely to blow through the entire limit anyway in just one claim.

Of course there can be some reinstatement to deal with, if a re/insurer was allowed to categorise either the Camp or Woolsey (or both) fires as two events. But the cost of this would be minimal to the reinsured party, compared to getting the benefits of a second reinsurance or retro payout.

Market sources suggested that if someone can claim twice on reinsurance for one of the fires it could have significant ramifications for the eventual market loss as others try to follow suit. A number of insurers are hoping to push for the ability to make two claims at this time, we’re told.

We’re told Lloyd’s players could be particularly exposed to this type of occurrence, given the market terms offered to some smaller insurers operating in the California region.

Of course, on the other hand some reinsurers could try to say that as the two wildfires fall within a single hours clause they constitute a single loss event, meaning they could payout only once across the Camp and Woolsey wildfire, albeit with retentions limited.

However, everyone we’ve spoken with said this is unlikely to hold, unless someone had particularly long hours clause terms and also very loose definitions of what constitutes an event. Management at insurer The Hartford said recently that they see the wildfires as a two-loss event from a reinsurance perspective.

It’s also a consideration for reinsurers that provide protection attaching higher up. If a single fire can be split into two claims each may be too low to trigger the reinsurance anyway, so this can work both ways.

As the wildfires burned in north and south California, miles apart from each other, it seems likely they will be treated as two separate loss events, making the main question about whether anyone can claim twice on their reinsurance for a single fire.

It remains to be seen how this will go for the insurers raising questions, as success is not guaranteed no matter how loose their reinsurance terms or short their hours clause, but it’s another issue to be aware of as the impact from these wildfires continues to be assessed.

Read our previous coverage of this wildfire outbreak:

Camp wildfire industry loss up to $9bn: AIR.

Woolsey wildfire industry loss at least $2.5bn: AIR.

Wildfire industry loss could be as much as $15 billion: Moody’s.

Amundi Pioneer predicts larger California wildfire ILS loss impact.

Mercury General’s reinsurance to cover $216m of its wildfire losses.

Expect $15bn to $19bn California wildfire property loss, says Corelogic.

California wildfires to cost over $10 billion “if not much more” – Aon.

California’s Camp wildfire toll rises by another 1,273 structures destroyed.

Wildfire losses should have been priced in, says Fitch.

Mutual & listed ILS funds decline further on wildfire threat.

Modest wildfire impact possible for Pioneer ILS Interval Fund.

Cat bond funds take NAV hit on wildfire cat bond write-down.

RMS puts Camp & Woolsey wildfire losses at up to $13 billion.

California wildfire losses rising, destruction nears 15,500 structures.

PG&E’s wildfire cat bond marked down for loss, traded at distressed price.

USAA cat bond & private ILS also at risk of wildfire losses: Twelve Capital.

PG&E sued over Camp wildfire, putting Cal Phoenix Re cat bond in the frame.

Wildfires could cost insurers $5bn to $10bn: Credit Suisse analysts.

Wildfires to drive up to $6bn industry insured loss – Moody’s.

Wildfire losses to hit record in 2018, pricing needs to change: A.M. Best.

Stone Ridge & CATCo fund prices dented by California wildfire threat.

Cat bond price volatility & discounts expected from wildfires: Plenum.

California wildfire most destructive ever, multi-billion losses expected.