Recent natural catastrophe losses, including the huge storm and flood losses that have hit European insurers during the last two years, are prompting reinsurers to reassess the terms of catastrophe coverage.

One change being considered is a new definition of an insured event under reinsurance contracts and how losses paid by insurers after storms or other major catastrophes are aggregated for reinsurance coverage purposes.

A recent technical paper published by Swiss Reinsurance Co. contends that improved scientific techniques generally make it much easier these days to define an event occurrence for reinsurance purposes, reducing the need for the so-called hours clauses that currently are used in most catastrophe reinsurance contracts.

The Zurich-based reinsurance company is encouraging its clients worldwide to accept a new event definition wording it has drawn up that reduces reliance on hours clauses. Swiss Re began using the new wording at year-end renewals, and several other reinsurers are examining the issue.

An hours clause defines an insured occurrence as a period of time after an event, such as losses incurred for 24 hours after a tornado, or 72 hours after a storm or riot. The clauses were introduced in the 1940s and have been "essential tools in the reinsurance industry, particularly catastrophe excess of loss, ever since,"

according to the recently published Swiss Re paper on event definition.

The paper states, though, that "scientific progress has made it possible to determine natural events without relying on traditional hours clauses, where the primary focus shifted from the physical phenomenon itself to an artificial measure of time."

Misunderstandings about how to apply the hours clause are not uncommon and, even when properly applied, an hours clause may cut off coverage in the middle of an event, the paper states.

Losses from the recent U.K. floods illustrate some of the challenges of defining an occurrence under the hours clause (see related story).

Swiss Re states in its paper that by more clearly defining an event and not using hours clauses to define a loss occurrence, reinsurers and ceding companies will attain a more accurate view of their exposures.

According to the new Swiss Re clause: "An event shall include all insured losses which arise directly from the same cause and which occur during the same period of time and in the same area. Such cause is understood to be the peril which directly occasions the losses or where there are several perils which, in an unbroken chain of causation, have occasioned the losses, the peril which triggered the chain of causation."

Perils identified in the wording as single events include:

* Storms due to an atmospheric disturbance usually so designated by a meteorological institute.

* Hail and/or thunderstorms and/or tornadoes due to a single atmospheric disturbance.

* Earthquakes, tsunamis and volcanic eruptions.

* Floods by one and the same instance of high water, which may have more than one peak and which may occur in one or more bodies of water.

* Conflagration.

* Strikes, riots, civil commotion or violent demonstrations taking place within the boundaries of a single city, town or village.

The new wording still includes an hours clause should it not be possible to determine the number of events under the new clause. The new hours clause states that an event encompasses a "continuous period of time starting with the occurrence of the reinsured's first individual loss" and lasting:

* 24 hours for hail/thunderstorms or tornadoes.

* 72 hours for storms, conflagration and strikes and riots.

* 168 hours for earthquake, tsunami and volcanic eruption.

* 504 hours for flood.

"In the case of differing perils which are not connected to each other by an unbroken chain of causation, the applicable number of hours corresponds to those of the peril which has caused the largest amount of damages," the Swiss Re wording states.

"In the case of more than one event, if it is impossible to allocate any losses, the reinsured shall allocate them to the event whose cause is most likely to have occasioned them," the wording adds.

Swiss Re devised the new wording to "give clarity of what is covered at the beginning of a contract," said John Davis, wordings controller for Swiss Re UK in London.

Today, for example, cyclonic depressions can be tracked much more accurately than in the past and there is no need to use an hours clause to aggregate the losses stemming from one event, he said.

"It will help rating structures to get rid of the hours clause," said Mr. Davis, who pointed out that the derivative market works on the basis of one catastrophe, without using hours clauses.

Although in the planning process for two years, the reinsurer introduced the new wording in the London market only last year, in advance of the 2000 renewal season. It now is promoting acceptance of the clause throughout the world by insurers that purchase reinsurance from Swiss Re, though its use is not being required.

But use of the clause so far has been limited, Mr. Davis admitted.

"As with anything new, it is an education process," he said.

According to Swiss Re's launch material, published late last year, "introducing the new event definition may necessitate certain adjustments to catastrophe covers. Still, the improved adequacy of the policy should outweigh the added initial effort of reassessing the relevant exposure."

Other reinsurers and reinsurance brokers are still examining the Swiss Re wording.

Paris-based reinsurer SCOR S.A. is examining how it uses the hours clause as part of an overall review of catastrophe coverage terms and conditions in the wake of devastating windstorm losses in late 1999 that hit the French market.

"We are looking at the 72 hours definition. We are also looking at the actual definition of what is covered. We have seen it with some of the storms in Europe that what is actually covered is a bit extensive. There should be a tightening of primary insurance cover and the way that primary insurance companies are settling their losses," said Serge Osouf, president and chief operating officer of SCOR.

Munich Reinsurance Co. is "aware of Swiss Re's new wording" but a spokeswoman for the Munich-based reinsurer noted that wordings and clauses would be adapted to individual clients and for individual perils, rather than applied uniformly throughout the industry. The new clause is "one more tool for reinsurers to be flexible," the spokeswoman said.

"We welcome any new initiative in this area, although we haven't yet seen the new clause used in any reinsurance involving us," said Paul

Hertelendy, property/catastrophe underwriter for Zurich Re in Zurich, Switzerland. "As a professional leading reinsurer, we keep this aspect under constant review and have been considering the impact of this new development in the context of our existing wordings."

The need for this is demonstrated by the industry response to the 1999 Lothar and Martin storms and the 1997 floods in Poland and the Czech

Republic, he said.

Mr. Hertelendy said he welcomes any clause that "creates more transparency or certainty and enables insurers and reinsurers to have a clear idea of the most-appropriate allocation of claims in relation to natural catastrophes, always bearing in mind the contractual arrangements."

"The question whether this clause would have a material impact on pricing remains to be answered and is dependent on a number of other factors," he said.

"But I am sure that a clear definition helps to keep disputes or differences of opinion to a lower level, and so reduce any related adjustment and legal costs after an event or a series of events, which is and must be beneficial for both insurers and reinsurers."

Reinsurance broker David Stark, managing director of London-based Guy Carpenter & Co. Ltd., said that acceptance of the Swiss Re wording by insurers has been limited.

"Clients have not really requested the (Swiss Re) clause. They are tending to stay with the traditional hours clauses as they are tried and tested," Mr. Stark said.

The "main problem with the hours clause is that the definition of the event is problematical. The Swiss Re wording does not change the basic requirement that an event needs to be identified," Mr. Stark said, pointing out that most cedents will choose an event definition that "best suits their portfolio and loss circumstances."

Cedents' view of a change in the hours clause would depend on their own circumstances, agreed Steven K. Bolland, senior vp at Gill & Roeser Inc., a reinsurance broker in New York.

For example, when Hurricane Hugo hit Puerto Rico and the East coast of the United States in 1989, some insurers were saved from blowing through their catastrophe coverages as the storm was determined to be two events under the hours clause, he said.

Other cedents with ample coverage, however, would prefer a similar storm to be labeled one event as then they would only have to finance one retention before claiming from their reinsurers, Mr. Bolland said.

"It's a judgment call," he said, noting that there has been little discussion of Swiss Re's new event clause in the U.S. market.

Copies of the Swiss Re paper "Event Definition: Swiss Re's New Event Clause" can be downloaded free of charge through the publications area of the Web site www.swissre.com.