Risk attaching Vs Loss Occurring (2024)

RISK ATTACHING VERSUS LOSS OCCURRING

In the context of reinsurance contracts, the terms "risk attaching" and "loss occurring" refer to different triggers for when the reinsurance coverage comes into effect. These triggers determine the point at which the reinsurer becomes responsible for sharing in the potential losses of the ceding insurer. Generally, proportional treaties are on a risk-attaching basis and the excess of loss program are on losses occurring basis.

This becomes important especially when a company is planning to move from proportional treaties to non-proportional programs. This will result in the primary insurer needing to purchase a higher level of catastrophic coverage. The proportional treaties provide immense value in reducing the Cat exposures of a primary insurer. Technically proportional treaties provide unlimited coverage, but for the ‘event limit’ imposed in the treaty. This is the main reason why the proportional treaties are becoming unpopular as far as reinsurers are concerned.

Every reinsurance contract specifies the date of inception and date of termination. This period of coverage is the period during which the Reinsurer will be responsible for the claim arising from risks ceded during the period of effect of the treaty. This period of coverage might be loss occurring, risk attaching or accounting year.

Under a risk attaching basis, the reinsurance coverage is triggered based on the attachment of the risk. The reinsurer pays for the losses arising from policies that are issued or renewed during the reinsurance contract period, regardless of the date of occurrence of the losses. In other words, the treaty is based on an underwriting year basis.

Let us take an example:

ABC insurer purchases a reinsurance contract on a risk-attaching basis for the period 01 April 2023 to 31 March 2024. A policy was issued on 10th April 2023 and a loss occurs on 15th Jan 2024, then this loss will be covered. If there is a loss on a policy issued prior to 1st April 2023, then this treaty will not embrace that loss.

On the other hand, “Loss occurring” treaty means that the Reinsurer only pays the primary insurer for all losses incurred during the reinsurance contract period, regardless of when the policy’s insurance generated the loss.

Let us take the same example:

ABC insurer purchases a reinsurance contract on a loss occurring basis for the period 01 April 2023 to 31 March 2024. A policy was issued on 10th April 2023 and a loss occurs on 15th Jan 2024, then this loss will be covered. But if there is a loss on 20th April 2024, then that loss will not get covered.

Generally, the excess of loss program would be on a loss occurring basis and therefore, pay for the losses from policies written that year and occurred that year. It can also be placed on a risk attaching basis. If it is written on a risk attaching basis it will sync with proportional treaties and would give run-off protection. But excess of loss program on a risk attaching basis is not preferred by the reinsurers because it may take many years for all the claims to fructify and get settled finally. Till that time, the profitability of the excess of loss program will not be known to the reinsurers. So, it becomes very difficult for the reinsurers to appropriately adjust the rate based on the experience at the time of renewal. Because claims may get reported after several years. The best example is asbestos claims. In the US many employers were found liable due to damages suffered by an employees who were exposed to asbestos many years ago. Hence, the risk attaching contracts are not so popular with the reinsurers.

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