Catastrophe Surge, Reinsurance Notice, and an Over-Limit Warehouse Risk
A managing general agent writes small commercial property risks under a binding authority of $2.5 million per risk. It has a catastrophe reinsurance treaty with a $4 million retention per event and a $30 million limit. A hailstorm produces 380 claims in five days. The third-party administrator has 12 adjusters, each with $25,000 authority; 40 claims exceed $100,000, and one warehouse risk has a $2.8 million building limit, above the MGA's binding authority. The MGA's file for the warehouse is missing the sprinkler inspection and the correct roof age. The treaty requires notice of a probable catastrophe within 72 hours and a preliminary loss estimate within 30 days. The regulator requires acknowledgement of claims within 10 days and a decision within 60 days. The MGA's claims manager wants to pay all small claims immediately and defer the large ones.
1. What are the first 72 hours' priorities?
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Activate the catastrophe plan and give the reinsurer notice of a probable catastrophe within the treaty's 72-hour requirement, even though the ultimate loss is uncertain. A late notice can prejudice reinsurance recovery. Segregate the 380 claims by severity and cause, identify the 40 large claims, and assign experienced adjusters or vendors to them. Confirm each adjuster's authority and escalate anything above $25,000. Set up a single claim intake and acknowledgement process so every claimant receives the required acknowledgement within 10 days. Preserve evidence, especially roof condition and hail damage, before repairs begin. Begin a preliminary loss estimate and track aggregate development daily. Communicate with the reinsurer and the regulator as required. Do not let the volume justify skipping documentation. The claims manager's pay-small plan can be part of triage, but it must not become a reason to ignore the large losses.
2. How should the MGA handle the warehouse risk that exceeds its binding authority?
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First determine whether the policy was validly bound. Check the binder, the underwriting file, and the MGA's authority. If the MGA exceeded its $2.5 million authority on a $2.8 million building, notify the principal insurer immediately and do not make coverage decisions unilaterally. The insurer may ratify the coverage, deny it, or handle it under a reservation of rights. Do not deny solely because the MGA exceeded authority; the insured may have relied on apparent authority. Investigate the missing sprinkler inspection and roof age because those facts affect coverage, subrogation, and reinsurance. Preserve the underwriting file and document who bound the risk. Escalate to the MGA's errors-and-omissions insurer if a coverage gap is possible. The reinsurance treaty may also be affected if the risk was outside the covered portfolio. Treat this as a governance and reporting issue, not just a claims issue.
3. What reserving and regulatory issues arise from the pay-small/defer-large plan?
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Paying clear, low-value claims quickly is good practice, but deferring large claims to manage cash flow or capacity is not. Each claim is subject to the acknowledgement and decision timelines. Large claims still need timely contact, investigation, and a coverage decision within the regulatory period or a documented extension. Set case reserves promptly and report aggregate development to the reinsurer; the $4 million retention may be exhausted quickly. Do not let the 12-adjuster capacity problem become a reason for silent delay. Use temporary adjusters, triage protocols, and escalation for claims above $25,000. Track the 40 large claims separately and document the reasons for any extension. The regulator may view a deliberate deferral of large claims as unfair claims handling. The MGA should also confirm that its reinsurance notice and preliminary estimate are consistent with the reserving data it reports internally.