Study 3 - The Treaty Document

Question 1

Preamble

Answer 1

Sets out or specifically names the counterparties to the agreement and defines them as the company and the reinsurer.

Question 2

3 things the preamble must do if there are multiple reinsurers

Answer 2

1. Defines the one or several reinsurers collectively as the reinsurer
2. Establishes that, despite the use of a single contractual document, there are separate agreements between the insurance company and each reinsurer, who has committed itself to a distinct percentage participation without commitment to the other reinsurers
3. Finally, the preamble identifies how each reinsurer attaches to the agreement

Question 3

Joint and several liability

Answer 3

A legal term suggesting a partnership in which parties are bound to pay off all obligations regardless of the ability of some of the parties to pay all (or any) of the amount that would otherwise be apportioned to them.

Question 4

Signature Mechanism

Answer 4

• The treaty must be signed by and countersigned by an appointed official of each party
• This may be accomplished by adding a signature article toward the end of the document when this is between the company and a single reinsurer
• When multiple reinsurers a common method is to create a single or master treaty agreement to which multiple signature pages may be attached
• There is also an interests and liabilities agreement as an option when there is multiple reinsurers

Question 5

Scope of Agreement/Scope of Treaty Article

Answer 5

• Answers the questions of what and where?
• Details the class or classes reinsured and the geographic limitations (territory) of reinsurance coverage

Question 6

Period of Cover

Answer 6

• Aka term and cancellation, period or inception and termination, or term of agreement
• Sets out the duration of the agreement
• Often corresponds with the company’s fiscal year

Question 7

Period of Cover/Termination notice for proportional vs non-proportional

Answer 7

• Most non-proportional treaties are written for a one-year term, and so there is no need for either party to give notice of termination
• Most proportional treaties are written on a continuous basis and may be terminated only at any anniversary date upon the request of either the insurance company or the reinsurer
• Usual notice period is stated as either 3 months or 90 days before the anniversary date

Question 8

Special Termination Article

Answer 8

• unofficially known as the “sudden death clause”
• the article includes several triggers that allow one or the other party to invoke cancellation

Question 9

Underwriting Exclusions

Answer 9

• the reinsurer may simply consider certain risks to be too hazardous or historically unprofitable
• some risks may not be permitted due to the reinsurer’s own mandated guidelines
• classes of business that are/should be reinsured by other treaties may be excluded from this contract to avoid unintended duplication
• many class definitions are so broad as to require the exclusion of certain sub-classes (professional liability may exclude medical malpractice)
• many exclusions address difficult risks or classes so specialized as to require greater underwriting experience

Question 10

Absolute Exclusions

Answer 10

• War or CBNR (chemical, biological, radiological, nuclear) threats
• Risks that, by law or market practice, demand specific treatment, such as the insurance of nuclear facilities and related risks or certain auto insurance products falling under the authority of provincial governments

Question 11

Risk-attaching basis (underwriting-year basis)

Answer 11

• also called policies-attaching basis
• the reinsurance treaty assumes liability only in respect of policies written or renewed during the treaty year

Question 12

Policies-in-force basis

Answer 12

• also known as losses occurring
• the treaty assumes the risk of loss from all policies that are in force during the treaty year, regardless of when they were underwritten

Question 13

Access to records article

Answer 13

• variously called books and registers, right of inspection, or access to records
• acknowledges the reinsurer’s right to inspect the ceding company’s records pertaining to business that is subject to the treaty
• most common application is the reinsurer’s ability to conduct underwriting and claims audits

Question 14

Errors and Omissions Article

Answer 14

• Mistake happen
• So long as discovery does not reveal a consistent pattern, and provided mistakes are corrected as soon as they are discovered, reinsurers normally regard them within the good faith spirit of the relationship
• The errors and omissions article addresses all aspects of the reinsurance relationship, from ceding risks to the treaty to accounting to claims

Question 15

Risks inadvertently insured article

Answer 15

• protects the insurance company from rapid or unreported changes in a particular policyholder’s exposure

Question 16

Alterations Article

Answer 16

• not unheard of for all parties to agree on a mid-term change to the reinsurance agreement
• this article addresses this possibility, noting that appropriate documentation, in the form of an exchange of correspondence or countersigned addendum, must be executed

Question 17

Insolvency Article

Answer 17

• Under normal contract law, the insolvency of one party to a contract terminates the agreement
• In reinsurance contracts, steps must be taken to protect the interests of policyholders and third-party claimants
• this article secures the reinsurer’s agreement to waive its right and pay claims as if they had been paid in full by a solvent insurer

Question 18

Dispute Resolution Article

Answer 18

• Settling disputes in the public courts can be expensive, time-consuming, and of course uncomfortably public
• the parties agree to arbitrate (Scott v. Avery clause)
• Includes following steps:
  1. the disputing party appoints an arbitrator and advises other party of its intent to enter arbitration
  2. The other party appoints an arbitrator, and the two arbitrators appoint a third person to act as the umpire of what becomes the arbitration panel
  3. The panel has extensive authority to conduct the arbitration and make an award
  4. The award is both binding and court enforceable

Question 19

Intermediary Article

Answer 19

• This article merely documents the agreement between company and reinsurer as to the role of the intermediary and its function as the nexus for such matters as documentation, claims, and accounting

Question 20

Reinsurance Intermediary

Answer 20

A reinsurance broker that negotiates contracts of reinsurance on behalf of the reinsured, receiving a commission for placement and other services rendered

Question 21

Name the parts, articles or sections that answer the Who? What? Where? When? and How?

Answer 21

Who: Preamble, Signature Mechanism
What and Where: Scope of Agreement, Exclusions
When: Period of Cover Article, Special Termination Article (sudden death clause)
How: Basis of Attachment Article