5 Outline Catastrophe Reinsurance PURPOSES                                                                                208 CATASTROPHE PERILS                                                        211 THE OCCURRENCE TREATY                                               216      Contract Provisions           Contract Percentage Coverage: Coreinsurance           Layered Coverages           Reinstatements           Exclusions           Application of Coverage           Definition of Loss Occurrence      Claims      Rating           Factors to Consider           Rating Approaches DESIGNING THE CATASTROPHE PROGRAM                 229      Catastrophe Limit and Loss Retention           Reinsurance Limit           Concentrations           Underlying Covers           Adjusting Losses      Changes      Retention           Leverage and Liquidity           Aggregate and Occurrence Protection           Company's Participation           Layers           Choosing Amounts           Programming Options      Sample Programs: Small, Regional, Large Reinsureds      Continuity SUMMARY                                                                               239
	5 Catastrophe Reinsurance by John F. Cannon *      There are four urgent reasons for any insurance company to focus on its exposure to perils associated with catastrophes affecting properties the company has insured. A catastrophe can be defined as a sudden, violent, physical manifestation that causes widespread and severe property damage. (Casualty catastrophe perils are covered in the chapter on casualty excess of loss.) The reasons are urgent because, if ignored, the perils can be life threatening for the company. Catastrophes are relative in strength and some are worse than others. 1. Catastrophe perils are unpredictable. Compared with primary insurance perils of a noncatastrophe nature, catastrophe perils are unpredictable as to location, frequency, and severity of the catastrophe. For the individual company, the timing of a catastrophe may be the worst possible. 2. Catastrophe exposure for the company is unknown. While the amount of primary insurance liability for any company is measured by summing the policy limits, the amount of catastrophe exposure cannot be determined with any precision until after the event. 3. The law of large numbers (averages) is limited in its benefit to the reinsured in catastrophes. Catastrophes are infrequent occurrences, particularly as they affect an individual insurance company. 4. The potential of unreinsured catastrophe exposures is deadly to the insurer. If not managed properly, catastrophe perils can destroy the insurance enterprise. While the company's intent is to protect the * Retired Executive Vice President, THE MERCANTILE AND GENERAL REINSURANCE COMPANY OF AMERICA and THE TOA-RE INSURANCE COMPANY OF AMERICA, 177 Madison Avenue, Morristown NJ 07962-1930. An autobiography follows the chapter. This chapter has been a collaborative effort with Messrs. Patrick J. Clark and Vincent S. Potts, Vice Presidents of M&G and Toa-Re, to whom the author expresses his gratitude for their help. Editor's Note: In revising the chapter, "The Property Catastrophe Reinsurance Contract," written by Robert S. Gilliam, Jr. for the original edition of this book, John Cannon and associates prepared an entirely new manuscript except for the 1980 sections, "Formula Rating" and "Continuity," which were reproduced.