Brokers push for tightening of Middle East “escalation clause” wordings at 1.1

Reinsurance brokers have been pushing to remove or clarify the language of Middle East conflict escalation clauses that certain reinsurers inserted into specialty treaties at 1 January 2024, The Insurer understands.

Several reinsurers, including Swiss Re, are understood to have inserted an“escalation clause” into certain specialty treaty contracts at 1.1 2024.

Swiss Re’s clause excludes any loss, damage or expense from risks located in Israel and a group of named territories arising from an outbreak of war, invasion, acts of foreign enemies or armed hostilities between Israel and the named territories, according to sources.

These named territories are understood to include Syria, Jordan, Egypt, Iran, Iraq, Saudi Arabia and Yemen.

The trigger is defined by the “reasonable opinion” of the lead underwriter and takes effect after a seven-day notice period.

Hannover Re is also understood to have inserted a Middle East conflict clause into many of its specialty treaties. It is understood that when Hannover’s clause is triggered it sets insured loss limits rather than a blanket exclusionary “escalation clause”. Sources said Hannover Re’s loss limits vary from client to client.

Despite their differences, both clause types have faced criticism for what is seen as an unsustainable trigger scope offered to reinsurers.

Wordings give the lead reinsurer the option of triggering the clause if, in their “reasonable opinion”, there has been war, invasion, acts of foreign enemies or acts of hostilities between Israel and the named territories.

Sources said this presents too wide a judgement over when to trigger the clause, particularly on acts of foreign enemies or acts of hostilities.

The wide scope has caused uncertainty among primary carriers over the limits of their reinsurance cover when this cover may be withdrawn. It is understood this has resulted in significant variance in primary market terms and conditions, and undermined market confidence.

Reinsurance brokers will look to address this uncertainty through adjustments to wordings at 1 January 2025 renewals.

Firstly, negotiations have focused on the tightening of the language around when reinsurers can trigger the escalation clause.

It is also understood that productive discussions have been held over the streamlining of the named territories list.

Sources said that the list is expected to be narrowed to include Israel and the named territories of Iran, Lebanon and Yemen.

The outcome sources perceived as least likely was the removal of the respective clauses in their entirety.

It should be noted that neither clauses have been triggered despite various events that could be interpreted to meet the clauses’ criteria.

The most notable example was the missile attacks between Israel and Iran in April. This began when Iran launched hundreds of drones and missiles at Israel in its first direct attack on the state, while Israel responded later in the month with air strikes on an Iranian defence facility.

More recent examples include the military strikes between the Israeli Defence Force and Lebanon-based Hezbollah, particularly the July strike on Golan Heights. And this week reports have suggested that Israeli intelligence agency Mossad was behind targeted explosions of a number of hand-held radios used by Hezbollah across Lebanon. The blasts are reported to have killed 12 and injured thousands.

Yemen’s Houthis have also exchanged attacks with Israel, including strikes on Yemen’s Hodeidah port and this month’s Houthi missile strike on central Israel.

Swiss Re and Hannover Re declined to comment.