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New Definition of Loss Occurrence for a Volcanic Event
The heart of the definition problem lies in the fact that there is no agreed meaning for the term volcanic eruption. At Montserrat, for example, magma has been constantly intruding into a growing dome of lava since the autumn of 1995. Property damage and consequent insurance losses occurred, however, in discrete bursts involving collapse of the lava dome and the generation of pyroclastic flows. Did each dome-collapse constitute an event for insurance purposes, or should the entire eruption cycle, which is still going on, be classed as a single event?Even given agreement that each dome collapse did constitute a discrete event, disagreement between the allocation of losses to these events is critical in terms of triggering of the reinsurance cover remained. This proved to be especially difficult to ascertain when dome collapses occurred repeatedly over a period of a few weeks, as they did in the summer of 1997, and where the establishment of an exclusion zone around the volcano prevented reliable verification of damage timing.
The problem lay with the 72 hours clause that is generally applied to volcanic action but which is often unsuitable for this purpose. In order to take better account of the volcanic hazard characteristics, and improve the loss adjustment situation post-event, Alistair Milward, of Wellington Underwriting, and Bill McGuire of the BGHRC, proposed that the definition of loss occurrence for volcanic action should be extended to 672 hours. Although many eruptions continue for longer than this, the climactic phases of most eruptions, during which time most damage occurs, would be contained within this period.
This definition of loss occurrence is now available (NMA2842). Its application will help to negate the requirement for often-unverifiable loss allocation to individual damaging episodes, and ensure a more harmonious relationship between insurer and reinsurer. The full wording of NMA2842 follows:
DEFINITION OF LOSS OCCURRENCE (HOURS CLAUSE)
The words 'loss occurrence' shall mean all individual losses arising out of and directly occasioned by one catastrophe. However, the duration and extent of any 'loss occurrence' so defined shall be limited to:
(a) 72 consecutive hours as regards a hurricane, typhoon, windstorm, rainstorm, hailstorm and/or tornado.
(b) 72 consecutive hours as regards earthquake, seaquake, tidal wave.
(c) 72 consecutive hours and within the limits of one city, town or village as regards riots, civil commotions and malicious damage.
(d) 72 consecutive as regards any 'loss occurrence' which includes individual loss or losses from any of the perils mentioned in (a), (b) and (c) above.
(e) 672 consecutive hours as regards a volcanic eruptive event.
(f) 168 consecutive hours of any 'loss occurrence' of whatsoever nature which does not include individual loss or losses from any of the perils mentioned in (a), (b), (c) and (e) above.
No individual loss from whatever insured peril, which occurs outside these periods or areas, shall be included in that 'loss occurrence'.
The company may choose the date and time when any such period of consecutive hours commences and if any catastrophe is of greater duration than the above periods, the company may divide that catastrophe into two or more 'loss occurrences', provided no two periods overlap and provided no period commences earlier than the date and time of the happening of the first recorded individual loss to the company in that catastrophe, except for any 'loss occurrence' referred to in subparagraph (e) above, where only one such period of 672 consecutive hours shall apply within each annual period.
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