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M21 Commercial Insurance Contract Wording > Chapter 5: Treaty Reinsurance Clauses (Detailed) > Flashcards

Chapter 5: Treaty Reinsurance Clauses (Detailed) Flashcards

1
Q

Is there a standard treaty reinsurance wording on the London Market?

A

No

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2
Q

What are in Law and dispute resolution clauses?

A

Law and jurisdiction clauses

Dispute resolution clauses

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3
Q

Is a proportional treaty a continuous or fixed contract?

A

Continuous

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4
Q

What is a continuous contract?

A

Continues until termination on notice, agreement or otherwise

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5
Q

How long is the right to give notice under a proportional contract?

A

3 months

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6
Q

Are non-proportional treaties fixed or continuous contracts?

A

Fixed

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7
Q

Define a territorial scope clause

A

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
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8
Q

What is wrong with the world Incidental?

A

Imprecise and open to dispute.

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9
Q

Define Special Termination Clause

A

One/both parties may terminate the agreement immediately by serving written notice to the other

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10
Q

When can a Special Termination Clause be used?

A

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

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11
Q

What is included in termination events?

A
  • 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
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12
Q

Does the reinsurer remain liable for claims occurring before the date of termination?

A

Yes

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13
Q

Define a Special Acceptance Clause

A

A reinsured may submit business not covered by the reinsurance contract to the reinsurer for special acceptance under the contract

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14
Q

How will special acceptance be written?

A

As an endorsement

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15
Q

Define the Sanction Clause

A

Reinsurer has no liability to provide coverage or pay claims if in violation of any political/economic or trading sanctions

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16
Q

Define Currency Conversion Clauses

A

Relationship between currency of the original premium and/or claim transactions and reinsurance transactions.

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17
Q

What is the name of the clause which requires the default party to pay interest on amounts past due under the contract

A

Remittance Clause

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18
Q

Does a Remittance Clause need to be invoked in writing?

A

Yes

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19
Q

What is the name of the clause that allows reinsured to establish reserves for the reinsurer’s proportion of amounts outstanding to the treaty?

A

Loss Funding / Unauthorised Reinsurance Clause

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20
Q

What are the three main forms of funding the reserve clause?

A
  1. Funds withheld
  2. Cash advances (OCAs)
  3. Letter of Credit (LOC)
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21
Q

What is a Letter of Credit?

A

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.

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22
Q

What is Arbitration a from of?

A

Alternative Dispute Resolution

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23
Q

What is Mediation?

A

Third party attempts to broker a settlement

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24
Q

What rubric is applied to the mediation process?

A

Centre for Effective Dispute Resolution (CEDR) Model Mediation Procedure

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25
Q

What is a service of suit clause?

A

Legal requirement where the reinsured is domiciled in certain USA states and reinsurer is elsewhere. Local organisation is authorised to represent the reinsured

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26
Q

Define the underwriting policy clause

A

Reinsured to seek a reinsurer’s approval to significantly change its underwriting process

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27
Q

What does ECO and XPL clauses stand for?

A

Extra Contractual Obligations and Excess of Policy Limits

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28
Q

What is the ECO clause?

A

Extends the scope of the treaty to damages arising from reinsured’s bad faith or negligence in handling claims.

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29
Q

What are the similarities between ECO and XPL clauses?

A

Arise from claims handling conduct

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30
Q

What are the differences between ECO and XPL

A

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.

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31
Q

Is XPL the excess liability for the original insured or the insurer?

A

The originally insured

32
Q

Is ECO the liability of the original insured or the insurer?

A

The insurer

33
Q

What is a XPL Clause?

A

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

34
Q

What is the offset clause?

A

Parties can offset any balance or amount due from one party to the another under a reinsurance contract

35
Q

What clause ensurers that the reinsured remains interested in economic claim settlement?

A

Co-reinsurance clause / Co- participation (Proportional reinsurance)

36
Q

What clause excludes liability arising out of any reinsurance business written by the reinsured?

A

Reinsurance assumes clause

37
Q

What is aTransmission and Distribution lines exclusion clause?

A

Excludes liability for physical loss or damage to transmission and distribution lines and resulting business interruption losses

38
Q

What is an entire agreement clause?

A

Limits the parties’ rights and obligations to those set out in the contract and specified in the document alone

39
Q

What is a non-waiver clause?

A

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

40
Q

What key features must be taken into account in proportional treaty contract wording

A
  • 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
41
Q

What is the cession clause?

A

Nature and main terms of the proportional reinsurance

42
Q

What is the accounts year basis?

A

Reinsurers agree to assume liability during the period of reinsurance irrespective of the inception dates of original policy

43
Q

What is the underwriting year basis?

A

Reinsurers agree to assume liability on risks issued/renewed during period of reinsurance

44
Q

Whats are the reasons for termination?

A
  • Treaty good, reinsured wants to increase ceding commission
  • Treaty bad, reinsurer wants to reduce ceding commission
  • Reinsured wants to increase retention/reinsurance capacity
45
Q

A proportional treaty on an ‘accounts year’ basis covers all losses on policies issued or renewed during a particular year. True or False?

A

False

46
Q

What is a record of cessions clause?

A

Requires the reinsured to maintain a record of all cessions to the contract including renewals and amendments and provide a bordereau from to reinsurers

47
Q

What is a commissions clause?

A

How much commission is to be paid by the reinsurer to the reinsured and when it is to be paid.

48
Q

What is Ceding Commission?

A

Payable to the reinsurer as a fixed rate deduction from the premiums

49
Q

What is a sliding scale of commission?

A

Agreed where the rate of commission is determined by the treaty’s loss ratio.

50
Q

Define Incurred losses

A

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

51
Q

Define Earned Premium

A

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

52
Q

What is profit commission?

A

Additional commission based on performance

53
Q

What are the two principal methods to calculate profit commission?

A
  • Average system

- Deficit Carried forward method

54
Q

What is the average system in profit commission?

A

Average of aggregate treaty results for 3- 5 years

55
Q

What is the deficit carried forward method in profit commission?

A

A deficit for one year is carried and set against future profits. Either for 2-3 years or until the deficit disappears

56
Q

What is a portfolio transfer clause?

A

Transfer of liability for a reinsured’s pre-existing business.

57
Q

What will the loss portfolio transfer clause specify?

A

Premium portfolio assumption
Premium portfolio withdrawal
Loss portfolio assumption
Loss Portfolio withdrawal.

58
Q

Does it follow that of there is a portfolio assumption there is also a withdrawal?

A

No

59
Q

What is the clause that allows a reinsured to retain premium by requiring the reinsurer to deposit a fixed proportion of written premium?

A

Premium reserves (deposits`) Clause

60
Q

What is the clause that allows the reinsured to establish reserves for the reinsurer’s proportion of amounts outstanding to the treaty?

A

Loss reserves (deposits) clause

61
Q

What is the loss participation clause?

A

Requires the reinsured to participate as a co-reinsurer if a stated loss ratio is exceeded.

62
Q

Loss ratio formula

A

Total loss/ Earned Premium x100

63
Q

What are the key elements of the loss participation clause?

A

Definition and amount of the loss ratio if exceeded triggers the co-reinsurance
Extent of the co-reinsurance

64
Q

What is the clause that limits the amount of claims recoverable under the treat for a defined ‘event’ to a monetary amount>

A

Event limitation clause

65
Q

When will an aggregate limit be imposed?

A

Alternative or addition to an event limitation clause.

66
Q

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:

A

claims that have been established and due for settlement by an insurer that has entered into insolvency.

67
Q

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?

A

It ensures that Foggerty must claim from Slaters to the full extent of their liability before claiming from Orbit.

68
Q

Within a reinsurance treaty, an arbitration clause is a:

A

condition precedent that the parties agree to arbitrate certain disputes before taking court action.

69
Q

A reinsurer may insist on a co-reinsurance clause being included in a reinsurance treaty to:

A

ensure that the insurer remains partially liable for any claims it receives, and so remains economically interested.

70
Q

A fixed period reinsurance treaty:

A

is the most common type of treaty for a non-proportional reinsurance.

71
Q

Why would an insurer establish a loss funding reserve for its reinsurance arrangements?

A

Because its reinsurer is located in a jurisdiction that does not allow provision for reinsurance pay-outs for reporting purposes.

72
Q

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:

A

the cover was arranged on an accounts year basis.

73
Q

Under the terms of the proportional reinsurance treaty between an insurer and its reinsurers, ceding commission is payable by the:

A

reinsurer to the insurer as a deduction from the portion of the original insurance premium it receives from them.

74
Q

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:

A

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.

75
Q

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?

A

Loss portfolio clause.

M21 Commercial Insurance Contract Wording (6 decks)

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