Understanding CAT Coverage on a Cargo Policy

The cargo insurance market has experienced challenging conditions over the past few years. Cargo policies that include warehouse inventory coverage are subject to increasing scrutiny for property risk. One of the most critical elements of warehouse inventory coverage is what is known as CAT coverage. To help us understand more about this topic, we answered some common questions we've been asked about CAT coverage.

What does CAT refer to, and what are classified as CAT risks?

When it comes to cargo insurance, the term “CAT” refers to catastrophic risks and, more specifically, “natural” catastrophic events. CAT (sometimes referred to as NATCAT) perils are typically defined as floods, earthquakes, windstorms, tornados, and, more recently, can also include wildfires. In most cargo insurance policies, the transit coverage will protect against natural disaster events during transit. When a cargo policy also covers inventory storage, there is typically a sub-limit and higher deductible that would apply to CAT perils.

Why do insurance companies treat those differently than other risks?

Insurers treat CAT risks differently than traditional inventory risks due to the potentially widespread nature of these losses, as well as the large financial consequences that generally accompany a CAT event. When a CAT event occurs, it is much more likely that the insured could experience a total loss, compared to most other insured events. Because of this, the insurers must run CAT modeling on the location of the warehouses to help them estimate the likelihood of a catastrophic event occurring at these storage locations and then set a premium that is commensurate with that risk.  

Is there an increased focus on CAT risks these days?

There is definitely increased attention to CAT risks right now, due to the increasing number of catastrophic events that are occurring each year. NOAA has reported that between 1980 and 2023, there was an annual average of 8.5 events with overall losses exceeding $1B in the US, while the annual average for the most recent 5 years (2019–2023) is more than 20 events per year.^[i]This trend is having an adverse effect on the insurance market. According to Swiss Re, one of the world’s largest property insurers, from 2017 onwards, insured losses related to CAT events averaged over $100 billion per year, compared to an average of only $52 billion annually over the previous 5-year period.^[ii] 

In 2023, the largest driver of insured CAT losses was severe convective storms (SCS), which led to roughly $50 billion in losses in the United States alone. Global insured CAT losses topped $100 billion, with total economic losses of over $260 billion. ^[iii]

What is the market like for CAT coverage?

CAT coverage is available through most cargo markets right now; however, there is a lot of underwriting discipline and an increased focus on modeling and setting appropriate per-occurrence and annual aggregate limits.

We are seeing some markets tighten their capacity for high CAT limits in certain areas, such as California and Florida, due to high earthquake and wind exposures. Generally, limits up to $10MM can be obtained, while some quota-sharing or excess programs may be needed for higher limits in these CAT-prone areas.

While coverage is available, it will certainly come at a cost. Long gone are the days when one could easily obtain “throw-in” coverage for CAT perils, and you should expect that pricing will be thoroughly calculated on a location-by-location basis, especially in the more CAT-prone areas of the world.

What can help a company obtain CAT coverage on their cargo policy?

In order to help facilitate a more efficient CAT quoting process, an insured should provide detailed “COPE” information to the underwriters, which identifies the construction, occupancy, protection, and environment of each storage facility. Buildings should be built according to proper code to withstand wind or other natural perils that are common in their geographic region. Ideally, buildings will have adequate fire protection and video surveillance equipment on site.

Oftentimes an insurer may want to send out a risk engineer to inspect the facilities and provide recommendations on how to mitigate against the risk of natural disasters. Being prepared to assist with these types of risk engineering visits can help build trust and rapport between the insured and the insurer, which will help with premiums in the long term.

The overall ability of an insurer to provide CAT coverage will also depend on the physical location of the buildings. If a warehouse is located in South Florida, for example, underwriters will have a much lower capacity to insure the facility than if it were located in a less CAT-prone area away from the coast.

Providing as much detailed information as possible on the buildings and inventory will help to ensure that coverage can be obtained and priced at a competitive rate.

Today’s cargo insurance market is evolving faster than ever. Getting the right coverage for your supply chain with the right limits will ensure your organization is fully protected. Moreover, it is important to pay attention to the stock or inventory coverage section of your policy to determine what level of coverage you have in place to protect against catastrophic events that could potentially cause a very large financial loss to your business. ECIB is here to help. For more information on CAT coverage or cargo insurance, reach out to our experts today. We would be happy to help review your coverage.

References:

^[i] National Centers for Environmental Information -https://www.ncei.noaa.gov/access/billions/

^[ii] Swiss Re - https://www.swissre.com/institute/research/sigma-research/sigma-2023-01/5-charts-losses-natural-catastrophes.html

^[iii] Insurance Journal - https://www.insurancejournal.com/news/international/2023/12/07/751177.htm