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M21 Commercial Insurance Contract Wording > Chapter 6: Treaty Reinsurance Clauses: non-proportional (Detailed) > Flashcards

Chapter 6: Treaty Reinsurance Clauses: non-proportional (Detailed) Flashcards

1
Q

What are the three types of excess of loss treaties?

A
  • per risk excess of loss
  • Catastrophe excess of loss
  • aggregate excess of loss
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2
Q

A per risk excess of loss treaty provides…

A

protection should a loss occur on an individual insurance policy which exceeds retention.

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3
Q

A catastrophe excess of loss treaty provides…

A

protection protection should losses occur on various policies from a catastrophe which in total exceeds the retention

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4
Q

An aggregate excess of loss treaty provides…

A

protection should losses occur in a class of business which exceeds retention.

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5
Q

How else is an aggregate excess of loss treaty referred as?

A

Excess of loss ratio

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6
Q

Does the aggregate excess of loss treaty apply before or after the benefit of other reinsurances?

A

After

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7
Q

What are the two methods of aggregate excess of loss treaties?

A
  1. As a percentage of the gross net retained premium income (GNRPI)
  2. Monetary values
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8
Q

What is a basis of cover clause?

A

Sets out the basis of cover provided by the contract

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9
Q

What does a basis of cover clause describe?

A

The relationship between the period of the reinsurance contract and a characteristic of the original insurance policy./claim.

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10
Q

On a X basis something must of happened during the reinsurance contract period

A

Losses occurring during (LOD)

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11
Q

On a X basis, reinsurers agree to assume liability for claims on risks during the period of reinsurance.

A

Risk Attaching During (RAD)

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12
Q

What are the three components which will ensure that a risk/policy is considered to attach?

A
  • It incepts
  • It resigns
  • Treated as having been resigned
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13
Q

Why can loss dates be outside the period of reinsurance

A

The applicable reinsurance contract period depends on the date of the original policy inception not date of loss.

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14
Q

Are tails under RAD long or short? Why? How does a reinsurer counter this?

A

Yes
There may be no limit on the period of the attaching policies
Impose a warranty limiting the period of the original risk

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15
Q

Is the adjustment of premium for RAD take place a year earlier or a year later than contracts written on LOD?

A

Later

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16
Q

For LOD does the date of loss need to fall within the reinsurance policy period?

A

Yes

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17
Q

What are the potential difficulties with the LOD basis?

A
  • How to deal with losses in progress at inception or expiry
  • What happens in the event of non-renewal
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18
Q

How do reinsurers solve the potential difficulties with LOD?

A
  • Extended expiration clause (extends cover for the duration of the event or occurrence)
  • Run-off clause (reinsurer will remain liable for all original policies covered under the agreement that are in force @ expiry)
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19
Q

What should the run-off clause stipulate?

A

When and how notice of election is to be given and premium for run off

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20
Q

Reinsurers agree to assume liability for circumstances notified to the insurer that fall within the period of reinsurance. Which basis is this?

A

Loss discovered basis/claims made basis

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21
Q

How are reinsurers’ exposure determined under the loss discovered/claims made basis?

A

When the original claim was made/loss discovered

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22
Q

When is a loss discovered/claims made basis used?

A

For liability treaties

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23
Q

If in successive calendar ye, the basis of cover clause changes from RAD to LOD, is there a gap in reinsurance cover?

A

No

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24
Q

What are the three premium calculations?

A

Flat Premium
Deposit Premium
Burning Cost Adjustment Premium

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25
Q

What is a flat premium?

A

Payable on or before a specified date

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26
Q

What is a deposit premium?

A

Adjusted at a specific rate percent on premium income.

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27
Q

What must a deposit premium clause state?

A
  • How and when the amount is payable
  • whether there is a min premium and amount if so
  • When adjustments are calculated
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28
Q

What is a burning cost adjustment premium?

A

Deposit premium is adjusted by reference to treaties claim experience

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29
Q

How is burning cost defined?

A

Claims paid and outstanding in excess retention as a percentage of premium income

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30
Q

Who are the parties to a premium clause and who are the parties to a trade set for receipt?

A

Parties for a premium clause are reinsurer and reinsured

Parties to a trade set are the reinsurer and broker

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31
Q

What is UNL clause?

A

Ultimate Net Loss (UNL) clause describes the loss to which the trade limits are applied.

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32
Q

What are the key characteristics of the UNL clause?

A
  • UNL = Sum actually paid by reinsured in settlement. The contract is to indemnify loss.
  • Expenses are included (unless specified)
  • Does not include ex gratia payments
  • Agreed deductions are recoveries, salvages, subrogations and claims on other reinsurances
  • Recovery by reinsured from reinsurer in advance of claim
  • Payments into courts or overseas equiv. are recoverable as loss settlement of the reinsured.
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33
Q

How does definition of cover vary between proportional reinsurance and non-proportional reinsurance?

A

Proportional - No need for separate definition as all losses are shared on the agreed proportion.

Non-Proportional - Event/loss occurrence needs to be defined to determine which loss will be aggregated

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34
Q

How will it be in the reinsured’s/reinsurer’s interest to aggregate loss assuming adequate vertical cover?

A

Reinsured’s interest to aggregate losses

Reinsurer’s interest to split them up and increase amount retained by reinsured

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35
Q

Where is a Loss Occurrence usually defined?

A

In the hours clause as the sum of individual losses arising out of one event

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36
Q

What is the proximate cause of the individual losses?

A

The event

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37
Q

What does the reinsured decide under the hours clause?

A

When a particular loss occurrence commences (loss period)

To divide the loss occurrence into multiple loss occurrences.

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38
Q

What is common for UK property catastrophe excess of loss treaties?

A

Add the freeze extension to standard hours clause LPO98A - Gives reinsured option of aggregating all claims occurring during a 168 hours

39
Q

What reinsurances does ‘Each loss occurrence’ not work well for and how is that rectified?

A

Claims which do not arise from a sudden identifiable accident or event.

In EL, usually incorporate standard Accident Circle Occupational Disease (ACOD) clauses - override conflicting provisions within the contract.
Claims Series Clause for product liability business enabling all claims from a specific cause be aggregated for recovery

40
Q

Who is the sole judge of what constitutes ‘each and every risk’

A

The reinsured

41
Q

What two risk warranty is contained in a catastrophe excess of loss reinsurance contract?

A

At least two risks must be involved in the loss occurrence

42
Q

What clause limits the amount of cover available under the reinsurance contract by specifying the number of times the reinsurance limit of indemnity may be automatically reinstated after loss?

A

Reinstatement Clause

43
Q

The reinstatement clause must specify whether the reinstatement are

A

free or paid.

If paid then must also include how the reinstatement premiums payable by the reinsured are to be calculated

44
Q

When are reinstatement premiums paid?

A

Same time as the claim

45
Q

What does a basis of reinstatement pro rata to amount and 100% as to time mean?

A

Additional premium is calculated on the amount of cover reinstated in proportion to limit of cover, irrespective of date of loss

46
Q

What does a basis of reinstatement pro rata to amount and pro rata at time mean?

A

The premium is pro-rated both to the amount of cover reinstated and to period of reinstatement (date of loss to expiry of contract)

47
Q

What does pro rata mean?

A

the process of dividing an object into equal portions depending on an individual’s share of the overall object.

It applies to the distribution of a sum across a number of units.

48
Q

If a reinsurance cover with a limit of indemnity and a deductible of 600,000 is subject to two reinstatements at 100% additional premium pro rata as to amount and 100% as to time, and the premium on the contract is 50,000. Calculate the total cover available to the reinsured and the associated cost.

A

Total Cover:
= 600,000 + 2 reinstatements
= 600,000 + 2(600,000)
= 1.8 million

Total Cost:
= 50,000 + associated cost for each reinstatement
= 50,000 + 2(50,000)
= 150,000

49
Q

What do Claims clauses address?

A

The notification by the reinsured of losses and provision of information to reinsurers

Reinsurers rights and obligations in relation to the loss

50
Q

What clause states when a notice should be given a by the reinsured to the reinsurer in the event of a loss or losses?

A

Notification of claims

51
Q

Why are notification of claims used by reinsurers?

A

To allow them to reserve appropriately whilst a claim is being adjusted

Respond promptly to reinsured’s loss settlements.

52
Q

How are claims under a non-proportion treaty recovered?

A

Individually

53
Q

When may a claims handling clause be imposed on the reinsured?

A

When the reinsurer’s exposure to loss/experience handling particular types of loss is greater than that of the reinsured

54
Q

What is a key determinant when negotiating Claims handling clauses?

A

The strength of the relationship between parties

55
Q

What are the obvious conflict between loss settlement clauses and claims co-operation clauses?

A

Loss settlement clauses trust the reinsured to make settlements where the claims co-ordination clauses do not.

56
Q

What clause appears in risk attaching during treaties

A

Interlocking Clause

57
Q

What is an interlocking clause?

A

Reinsured may incur more than one retention and reinsurer may have to pay more than one limit of liability for the same event. Interlocking clause distributes the losses between years

58
Q

What circumstances does the Interlocking Clause apply to?

A
  • The reinsured has losses under more than one policy but from the same occurrence
  • Original policies attach to different treaty periods
59
Q

Why is the Salvage/Subrogation clause so important?

A

Any recoveries would be deducted from the UNL and benefit the reinsurer alone

60
Q

A reinsured makes a subrogation recovery of 900,000 in relation to a loss on which it has already collected 200,000 from reinsurers. The limits and excess are both 1 million.

Calculate the amount to be reimbursed to the reinsurer?

A

900,000 * 200,000/1,200,000

= 150,000

61
Q

What stages are necessary to calculate the amount of loss to be paid in a reinsurance contract currency?

A
  1. Covert retention and limit into the currency of loss at the rate of exchange @ treaty inception
  2. Calculate amount of loss in excess of currency of loss retention but below currency loss limit
  3. Covert amount into contract currency at the rate @ date of settlement
62
Q

How much can the reinsured recover from its reinsurance under an excess loss treaty with a limit and deductible of £1mill in respect of an original claims payment of A$2.7 million.

The rate at inception was 2.5, at payment 2.0 A$ to £. treaty contains a currency fluctuation clause

A

= £1,000,000 * 2.5
= A$2,500,000

Claims - Retention
= A$D 2,700,000 - 2,500,000
= A$D 200,000

Convert into contract currency
200,000 / 2
= £100,000

63
Q

List the 8 liability clauses

A
  • Index Clause
  • Aggregate extension clause
  • Claims series clause
  • Sunset Clause
  • Extended Claims reporting clause
  • Occupational disease clauses
  • Change in law clause
  • Loss corridor clause
64
Q

What is the index clause?

A

Adjusts the reinsurance limit and deductible by reference to an index to take into consideration account inflation

65
Q

What are the key elements of the index clause?

A
  • index is identified (earnings, wages or retail index)
  • Base date is start date for purpose of claims, may pre-date the inception of treaty
  • A franchise may apply or a severe inflation clause
66
Q

London Market Severe Clause…

A

only responds in the event of severe inflation

67
Q

This clause allows a reinsured to present as one loss separate and unrelated losses

A

Aggregate Extension Clause (AEC)

68
Q

What does the AEC do?

A

Extend the aggregate basis of the original cover to the reinsurance contract

Contracts converted into ‘policies incepted during’ basis

69
Q

Define the Claims series Clause

A

Enables all claims from a specific common cause to be aggregated for the purpose of recovery.

70
Q

This clause requires the reinsured to notify claims within a certain period of time. Beyond this the contract ceases to respond

A

Sunset Clause

71
Q

Where are sunset clauses usually found?

A

US non-proportional casualty treaties

72
Q

What do the different parts of the Sunset Clause require?

A
  1. Notification

2. Parties may request to commute unsettled claims - appointment of independent actuary to investigate

73
Q

How does the Extended Claims Reporting Clause require the reporting of which three types of claims?

A
  1. Claims in excess of specified percentage of retention
  2. Types of serious bodily injury
  3. Claims involving periodic payments under the Damages Act 1986
74
Q

What does the occupational disease clause do?

A

Define what constitutes an event and date of the loss occurrence to help chose treaty period

75
Q

What are the standard occupations disease clauses called?

A

Accident Circle Occupational Disease Clauses (ACOD)

76
Q

Define ACOD/A

A

Any one claim by one employee is considered an event

77
Q

Define ACOD/B

A

Any one claims by one employee is considered an event and

  • if the original liability is established on an exposure basis
  • if legal liability is not established on an exposure basis
78
Q

Define ACOD/C

A

In relation to covers on a ‘claims made’ basis, any one claim by one employee is considered one event. Date of loss occurrence is deemed to be original insured is advised of claim following diagnosis

79
Q

This clause is designed to protect the reinsurers’ bargain with the reinsured from a change in law after the start of the treaty

A

Change in law clause

80
Q

What does the change in law clause do?

A

Significant increase in reinsurer’s liability then the parties agree to revise terms. If fails then reinsurance cover continues as law did not happen

81
Q

Where is the change in law clause common?

A

Casualty

82
Q

This clause describes an additional amount retained by the reinsured

A

Loss corridor clause

83
Q

What is a simultaneous settlements clause?

A

Requires reinsurers to pay the reinsurance claim at the same time the reinsured pays to insurance claim

84
Q

How long does the reinsured often agree to give notice under the simultaneous settlements clause?

A

Two weeks

85
Q

What has to be specified in the index clause?

A
  • The index to be used and its base date
  • Whether indexation applies to all claims or bodily injury only
  • Whether there is an excess of franchise and if so the percentage
86
Q

Why is an hours clause included in a property catastrophe excess of loss treaty?

A

To define the time period of loss occurrence for claims arising from the same peril and cause.

87
Q

The purpose of the reinstatement clause in a non-proportional reinsurance contract is to:

A

confirm the number of times the reinsurer will reinstate the reinsurance limit after a loss, with or without the need for additional premiums.

88
Q

When assessing a reinsurance claim, the reinsurer referred to the treaty to ascertain the aggregate losses to which deductibles apply. This means that the reinsurance contract between them is:

A

non-proportional.

89
Q

A currency fluctuation clause would be most appropriate for a non-proportional reinsurance contract between a reinsurer and an insurer, where the:

A

reinsurance liabilities are denominated in Sterling, but the original insurance contract is denominated in Dollars.

90
Q

An aggregate excess of loss treaty provides protection for the insurer up to a monetary limit, or:

A

an amount expressed as a percentage of the insurer’s gross net retained premium income.

91
Q

If non-proportional reinsurance facilities are offered on a per risk basis, the reinsurer’s liabilities are limited to:

A

the excess over a certain threshold of any claim received by the insurer relating to each policy it issues.

92
Q

What is typically the main reason for an insurer to ask for an ultimate net loss clause to be included in a non-proportional reinsurance treaty between it and its reinsurer?

A

So that it can expect settlement of at least some of its claim from the reinsurer before the original claim is finalised.

93
Q

What is the purpose of the currency fluctuation clause on a non-proportional reinsurance treaty?

A

To enable the reinsurer and reinsured to share the risk of currency fluctuation.

94
Q

In which type of reinsurance contract should an interlocking clause be included?

A

A treaty written on a risks attaching basis only.

M21 Commercial Insurance Contract Wording (6 decks)

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