Customer Lynne Rosenthal entered a shouting match with a barista after ordering her toasted treat, because she refused to specify that she did not want either butter or cheese with her order.
Rosenthal’s argument was that she should only need to say what she did want to order, and shouldn’t have to expressly exclude everything she did not want spread on her bun.
Although it may have been overkill to make such a fuss over a breakfast order that she was removed by police, Rosenthal’s point is logical.
And in London during this year’s property treaty renewals, a similar quirk in new underwriting rules is causing similar friction.
From the beginning of this year, Lloyd’s has been working to banish silent cyber risk from the market, beginning with an edict in January that required all first-party property contracts to either affirm or exclude cyber from cover.
From 1 July this year, the requirement has extended to property cat excess of loss, pro rata and risk excess reinsurance business, and in the upcoming European property reinsurance renewals, the policy is proving to be a sticking point in negotiations.
Most reinsurance is bought on an all-perils basis, and in this context, adding either clauses affirming cyber cover or excluding it makes sense.
However, Lloyd’s underwriting sources have said that European cedants do not see why, when purchasing named-perils reinsurance cover (a bagel), they must also agree to a cyber exclusion ("hold the butter and cheese").
On the face of it, it seems illogical to need to both list the perils explicitly covered and then name some that are not.
Cedants perhaps feel mistrusted by reinsurers. Being forced to sign an exclusion for a peril that is already implicitly excluded by a list of named perils might lead them to think reinsurers suspect them of attempting to slip in a cyber claim later on regardless.
On the other hand, Lloyd’s is aware of the huge potential for cyber losses and must take action to protect reinsurance syndicates from that risk.
Reinsurers have no choice but to comply with Lloyd’s edicts, as the Corporation is essentially a regulator, although they may take the view in any case that if cedants do not plan to attempt to make cyber claims on a named-perils policy, they should have no problem in adding an exclusion.
However, if I were a reinsurance CEO coming to the end of a year like this one, I too would want to make doubly sure that my underwriters were sewing up wordings tightly. The way in which pandemic-related BI losses slipped through the net is a lesson in ensuring contracts are watertight.
In fact, while nobody could have predicted the depth or duration of national governments’ mandated lockdowns this year, the potential for vast, widespread cyber losses is a known unknown (and the quantum is notoriously difficult to model).
Given that the command to include cyber exclusions in named-peril property treaties has come from Lloyd’s, this dispute can only end one way, and is most likely not a relationship-ending issue in the majority of cases.
It is, however, taking additional time and effort to explain, and creating another source of tension in what is proving to be a tense renewal period for property.
The growing clamour for reinsurance price increases after Covid costs and several years of significant cat losses, along with the operational difficulty of negotiating virtually, are just two factors colouring the discussions.
As this publication has noted before, reinsurers and cedants are already locked in a stand-off over how treaties should respond to Covid-19 BI losses, with an inevitable round of arbitration processes on the horizon.
Throwing requirements around another vast systemic risk, however necessary, will add further friction to the negotiations.
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