Chapter 5: Treaty Reinsurance Clauses (Detailed) Flashcards
Is there a standard treaty reinsurance wording on the London Market?
No
What are in Law and dispute resolution clauses?
Law and jurisdiction clauses
Dispute resolution clauses
Is a proportional treaty a continuous or fixed contract?
Continuous
What is a continuous contract?
Continues until termination on notice, agreement or otherwise
How long is the right to give notice under a proportional contract?
3 months
Are non-proportional treaties fixed or continuous contracts?
Fixed
Define a territorial scope clause
Limits reinsurer’s liability under the contract by reference to the location of
- the insured property,
- domicile of insured person or
- where the original policies were issues
What is wrong with the world Incidental?
Imprecise and open to dispute.
Define Special Termination Clause
One/both parties may terminate the agreement immediately by serving written notice to the other
When can a Special Termination Clause be used?
If there is significant change during the currency of the agreement in the character of the other party, or in the commercial/political background, from that which existed at placement
What is included in termination events?
- Insolvency of a party
- Introduction of law/legislation restricting or prohibiting the performance of the treaty
- War or occupation of a country where a party is domiciled
- Material change in ownership, management or control of the other party
- failure of one party to comply with the terms/conditions of the treaty
- Downgrading of rating agency
Does the reinsurer remain liable for claims occurring before the date of termination?
Yes
Define a Special Acceptance Clause
A reinsured may submit business not covered by the reinsurance contract to the reinsurer for special acceptance under the contract
How will special acceptance be written?
As an endorsement
Define the Sanction Clause
Reinsurer has no liability to provide coverage or pay claims if in violation of any political/economic or trading sanctions
Define Currency Conversion Clauses
Relationship between currency of the original premium and/or claim transactions and reinsurance transactions.
What is the name of the clause which requires the default party to pay interest on amounts past due under the contract
Remittance Clause
Does a Remittance Clause need to be invoked in writing?
Yes
What is the name of the clause that allows reinsured to establish reserves for the reinsurer’s proportion of amounts outstanding to the treaty?
Loss Funding / Unauthorised Reinsurance Clause
What are the three main forms of funding the reserve clause?
- Funds withheld
- Cash advances (OCAs)
- Letter of Credit (LOC)
What is a Letter of Credit?
Document issued by mutually acceptable bank at expense of reinsurer to the reinsured. Issuing bank will pay cash to reinsured on receipt of certain specified documents.
What is Arbitration a from of?
Alternative Dispute Resolution
What is Mediation?
Third party attempts to broker a settlement
What rubric is applied to the mediation process?
Centre for Effective Dispute Resolution (CEDR) Model Mediation Procedure
What is a service of suit clause?
Legal requirement where the reinsured is domiciled in certain USA states and reinsurer is elsewhere. Local organisation is authorised to represent the reinsured
Define the underwriting policy clause
Reinsured to seek a reinsurer’s approval to significantly change its underwriting process
What does ECO and XPL clauses stand for?
Extra Contractual Obligations and Excess of Policy Limits
What is the ECO clause?
Extends the scope of the treaty to damages arising from reinsured’s bad faith or negligence in handling claims.
What are the similarities between ECO and XPL clauses?
Arise from claims handling conduct
What are the differences between ECO and XPL
Loss or liability in questions is the subject of the XPL clause and would be covered under the original policy. With the ECO clause it falls outside the original policy.
Is XPL the excess liability for the original insured or the insurer?
The originally insured
Is ECO the liability of the original insured or the insurer?
The insurer
What is a XPL Clause?
Extends scope of the treaty to the original loss where it is in excess of the original policy limit and it originates from the reinsured’s bad faith
What is the offset clause?
Parties can offset any balance or amount due from one party to the another under a reinsurance contract
What clause ensurers that the reinsured remains interested in economic claim settlement?
Co-reinsurance clause / Co- participation (Proportional reinsurance)
What clause excludes liability arising out of any reinsurance business written by the reinsured?
Reinsurance assumes clause
What is aTransmission and Distribution lines exclusion clause?
Excludes liability for physical loss or damage to transmission and distribution lines and resulting business interruption losses
What is an entire agreement clause?
Limits the parties’ rights and obligations to those set out in the contract and specified in the document alone
What is a non-waiver clause?
Failure of one party to insist on the other’s compliance with a particular provision of the contract does not constitute a waiver of that right or remedy
What key features must be taken into account in proportional treaty contract wording
- Reinsured must reinsure and reinsurer must accept all business within the scope of the treaty
- Reinsured pays reinsurer a fixed proportion of the original premium
- Financial transactions are handled on a balance of account basis
What is the cession clause?
Nature and main terms of the proportional reinsurance
What is the accounts year basis?
Reinsurers agree to assume liability during the period of reinsurance irrespective of the inception dates of original policy
What is the underwriting year basis?
Reinsurers agree to assume liability on risks issued/renewed during period of reinsurance
Whats are the reasons for termination?
- Treaty good, reinsured wants to increase ceding commission
- Treaty bad, reinsurer wants to reduce ceding commission
- Reinsured wants to increase retention/reinsurance capacity
A proportional treaty on an ‘accounts year’ basis covers all losses on policies issued or renewed during a particular year. True or False?
False
What is a record of cessions clause?
Requires the reinsured to maintain a record of all cessions to the contract including renewals and amendments and provide a bordereau from to reinsurers
What is a commissions clause?
How much commission is to be paid by the reinsurer to the reinsured and when it is to be paid.
What is Ceding Commission?
Payable to the reinsurer as a fixed rate deduction from the premiums
What is a sliding scale of commission?
Agreed where the rate of commission is determined by the treaty’s loss ratio.
Define Incurred losses
Losses + Loss Expense paid by reinsurer in current year + Provision for outstanding losses at the end of current year - Provision for outstanding losses at beginning of current
Define Earned Premium
Premiums Written for the current year + Unearned premium reserve at the beginning of the current year - Unearned premium reserve at the end of the current yeah
What is profit commission?
Additional commission based on performance
What are the two principal methods to calculate profit commission?
- Average system
- Deficit Carried forward method
What is the average system in profit commission?
Average of aggregate treaty results for 3- 5 years
What is the deficit carried forward method in profit commission?
A deficit for one year is carried and set against future profits. Either for 2-3 years or until the deficit disappears
What is a portfolio transfer clause?
Transfer of liability for a reinsured’s pre-existing business.
What will the loss portfolio transfer clause specify?
Premium portfolio assumption
Premium portfolio withdrawal
Loss portfolio assumption
Loss Portfolio withdrawal.
Does it follow that of there is a portfolio assumption there is also a withdrawal?
No
What is the clause that allows a reinsured to retain premium by requiring the reinsurer to deposit a fixed proportion of written premium?
Premium reserves (deposits`) Clause
What is the clause that allows the reinsured to establish reserves for the reinsurer’s proportion of amounts outstanding to the treaty?
Loss reserves (deposits) clause
What is the loss participation clause?
Requires the reinsured to participate as a co-reinsurer if a stated loss ratio is exceeded.
Loss ratio formula
Total loss/ Earned Premium x100
What are the key elements of the loss participation clause?
Definition and amount of the loss ratio if exceeded triggers the co-reinsurance
Extent of the co-reinsurance
What is the clause that limits the amount of claims recoverable under the treat for a defined ‘event’ to a monetary amount>
Event limitation clause
When will an aggregate limit be imposed?
Alternative or addition to an event limitation clause.
Charter Reinsurance Co. Ltd v. Fagan [1996] addresses the position of a claim made to an insolvent insurer and its reinsurance arrangements. Under this ruling, if there is no specific provision otherwise, the reinsurer is liable for:
claims that have been established and due for settlement by an insurer that has entered into insolvency.
Foggerty has reinsurance arrangements with Orbit National, leaving Foggerty responsible for 40% of all claims it settles. It has a further reinsurance treaty with Slaters which covers all but the first £100,000 of its 40% portion of claims liability. In the event that Orbit is called upon to reimburse losses suffered by Foggerty, to what extent will the net retained lines clause assist them?
It ensures that Foggerty must claim from Slaters to the full extent of their liability before claiming from Orbit.
Within a reinsurance treaty, an arbitration clause is a:
condition precedent that the parties agree to arbitrate certain disputes before taking court action.
A reinsurer may insist on a co-reinsurance clause being included in a reinsurance treaty to:
ensure that the insurer remains partially liable for any claims it receives, and so remains economically interested.
A fixed period reinsurance treaty:
is the most common type of treaty for a non-proportional reinsurance.
Why would an insurer establish a loss funding reserve for its reinsurance arrangements?
Because its reinsurer is located in a jurisdiction that does not allow provision for reinsurance pay-outs for reporting purposes.
An insurer has a proportional reinsurance treaty which began on 1 July for a duration of 12 months. The insured, who took out a policy on 1 March, suffered a loss and claimed for it on 28 October. The reinsurer is liable to cover this loss provided:
the cover was arranged on an accounts year basis.
Under the terms of the proportional reinsurance treaty between an insurer and its reinsurers, ceding commission is payable by the:
reinsurer to the insurer as a deduction from the portion of the original insurance premium it receives from them.
When an insurer was negotiating the terms of its proportional reinsurance treaty, it insisted on a premium reserves clause. The reinsurer might object to this because it:
would allow the insurer to retain some of the reinsurer’s portion of the original insurance premium in case the reinsurer is unable to meet its obligations.
A reinsurer underwrites a proportional treaty on a continuous basis. If it wants to close off its accounts for any one year before claims have been fully settled, which clause should the reinsurer
ensure is within the contract?
Loss portfolio clause.
