‘Words matter’ in aggregation risk

In a constantly changing risk landscape, it is critical insurers pay close attention to policy wordings if they are to avoid unpleasant surprises when it comes to aggregation risk.

That was the main theme of a workshop at the Airmic annual conference in Liverpool this week, hosted by the International Underwriting Association (IUA). 

Called ‘A changing world: insurance policy wordings and aggregation’, the session examined the nature of aggregation risk from several angles.

Tom Hughes, senior underwriting and claims executive, IUA, started the event by illustrating the extent to which many risks are changing and evolving. He flagged the cyber threat, natural hazards and AI as three areas that are changing the nature of risk very quickly. He also noted that global trade and supply chains face unprecedented challenges.

“Some of the biggest risks our members deal with are becoming more frequent and more severe,” he said. “But that is why the words matter. We need to consider the nature of aggregation risks in what is a rapidly changing world.”

He also flagged the work of the IUA Clauses Committee, explaining it does three key things: publish model templates clauses carriers can use as they wish; monitor case law developments and publish thought leadership, as it looks to offer certainty and clarity.

Hughes was followed by Antonia Pegden, partner, Herbert Smith Freehills Kraemer, who went into more detail, using case law and several examples, to define aggregation risk and explain how it can impact insuers. She defined aggregation as: “Wording that provides for two or more separate losses covered by the policy to be treated as one individual loss.”

He further explained there must be a unifying common factor that links them; that this can also apply to deductible and limits. “Aggregation is a fact a sensitive exercise; crucial message: the words matter!” she said.

The well-attended session also prompted some searching questions from the audience, including what impact the growing use of parametric insurance might have on aggregation risk. 

Speaking after the event, Hughes told AIRMIC Today that this presented a good example of how the insurance models is evolving – and this made workings and the goal of contract certainty even more important. “The aim is to mitigate disputes,” he said.

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