Treaty Capacity, a HK$500 Million Fire and Two Typhoons
Pioneer Insurance Ltd is the sole insurer of a HK$2 billion industrial portfolio belonging to Harbour View Properties Ltd. For property risks, Pioneer's board has set a net retention limit of HK$50 million per risk. The reinsurance programme is a 30% quota share treaty, then a surplus treaty of five lines, each line equal to HK$50 million. In August 2024 a fire at a Kwai Chung warehouse causes a gross loss of HK$500 million, all within one risk. Separately, in September two typhoons strike Hong Kong five days apart and cause two separate losses of HK$80 million and HK$60 million on the same risk. The reinsurance treaty defines an 'event' as 'all loss arising from one event and, for storm or typhoon, all loss occurring within 72 hours'.
1. Calculate Pioneer's net retention on the fire and state whether facultative reinsurance is needed.
Read the worked answer
Fire: gross loss HK$500 million.
- Quota share: 30% × 500 = HK$150 million ceded; Pioneer retains HK$350 million.
- Surplus treaty: five lines × HK$50 million = HK$250 million capacity; the whole HK$250 million is ceded, leaving HK$100 million net.
- Board limit: HK$50 million net per risk.
Pioneer's net retention is therefore HK$100 million, double its limit. The surplus treaty is exhausted and still leaves too much net. Pioneer needs either:
- facultative reinsurance for at least HK$50 million, or
- a reduced line or co-insurance so that its gross share is below the programme's capacity.
Check the programme's maximum capacity after the quota share: retention HK$50 million + surplus HK$250 million = HK$300 million per risk. At HK$500 million gross, the programme is plainly too small. The shortfall must be covered facultatively or the line reduced.
2. How many 'events' are there for the two typhoons, and why does the 72-hour clause matter? Show the numbers.
Read the worked answer
The clause defines an event for storm or typhoon as all loss occurring within 72 hours. The two typhoons are five days apart - about 120 hours - so they are two events, not one.
Two events:
- Typhoon 1: gross 80 → quota share 24 → retained 56 → surplus: retain 50, cede 6 → net 50.
- Typhoon 2: gross 60 → quota share 18 → retained 42 → below the 50 retention, so no surplus cession → net 42.
- Total net = 92.
One event (if within 72 hours): gross 140 → quota share 42 → retained 98 → surplus cedes 48 (down to the 50 retention) → net 50.
The 72-hour clause therefore matters by HK$42 million in net retention. It also affects how many deductibles apply and whether any event limit is eroded once or twice. The wordings must be checked: the 72-hour clause usually applies to each 'event', and other perils may have a different hours clause (for example 168 hours for flood).
3. Pioneer settled a disputed liability ex gratia. Can it require its reinsurers to follow the settlement?
Read the worked answer
Not automatically. 'Follow the settlements' binds the reinsurer to a settlement that the cedent has made honestly and in a businesslike manner, provided the claim arguably falls within the original policy. It does not cover a payment made ex gratia - where the cedent had no legal liability - unless the reinsurance expressly extends to ex gratia payments.
Two further points:
- Claims control or cooperation clause. If the treaty requires the cedent to notify and obtain consent before settling, a settlement made without consent can prejudice recovery. Pioneer should check whether the clause is claims control (reinsurer controls) or claims cooperation (cedent controls but must consult).
- Allocation. If the settlement covers both covered and uncovered heads (for example a disputed policy defence and a goodwill element), the reinsurer is only bound to the covered part; the cedent must allocate.
Pioneer should disclose the settlement basis to its reinsurers, explain the legal and commercial reasons, and seek agreement. If the reinsurers refuse, Pioneer's recovery may be limited to the amount it could have been liable for on a proper application of the original policy.