Reinsurance Tutorials #16 - Season 2
Hi everybody 👋
It may seem unusual to use the term single risks when talking about reinsurance treaties that are designed to cover a set of homogeneous risks!
Indeed, a treaty provides a framework; a clear scope that encompasses the risks covered. By definition, if a risk does not fall within this scope, then the latter will not be covered by the treaty.
Thus, the insurer can make the choice of buying an ad-hoc cover, such as a facultative cover, for the specific risk to be written. But this can be quite complicated and may also oblige the reinsurer to require some management.
Additionally, the ad hoc cover may need to be written throughout the year, unlike a reinsurance treaty that is usually written on an annual basis.
Let’s start! ⏬
Special acceptances
This is why we sometimes write special acceptances, that is to say, risks that differ from those in the main portfolio which comply with rules laid down in the treaty.
This occurs when the insurer doesn’t want to keep 100% of its risk but would rather include a portion of it in the treaty and hence cedes a share of the risk to reinsurers.
The latter may consider and accept the risk on an exceptional basis if it doesn’t completely distort the nature of the underlying portfolio. This risk is what we call a “special acceptance” within the treaty.
Greater capacities and specific clauses
As discussed, it is often written during the year, when the insurer underwrites new business, and the special acceptance, if agreed by the reinsurers, is usually renewed directly in the treaty the following year.
Let’s look at a few typical examples: greater capacities than limits of the treaty (I insist on the fact that it shouldn’t transform the portfolio profile), or a different type of risk that is usually excluded because of its nature. Depending on the size of the risk, it may be reconsidered.
The insurer always asks the reinsurance leader if such a risk could be added to the treaty. However, specific clauses are included to provide for a framework in those cases whether the leader agrees or disagrees in the name of all the following reinsurers from the panel. In such case, the objective is to simplify the relationships between the cedant and its reinsurers by enabling the insurer to choose a privileged intermediary: the leader.
The latter is responsible for addressing the different issues related to the treaty, from claims management to the interpretation of clauses or, as mentioned, agreement on special acceptances. The leader must also bring its specific knowledge on the line of business under consideration.
Obviously, this clause is more or less restrictive for other reinsurers and, as far as the insurer is concerned, it is much easier to discuss with a single leader rather than with the entire panel of reinsurers.
Sometimes each reinsurer must be approached individually and asked to provide its support to the cedent. From the reinsurers’ point of view, this clause more easily enables it to manage its exposure in the portfolio.
Underwriting policy
What will be the basis of the acceptance?
It is very important for a reinsurer to understand and know the company's underwriting policy. It will obviously try to know more about this single risk that doesn’t quite seem to fit in the rest of the portfolio. For instance, sometimes the risk differs but this may be because it is a new policy supporting an already existing client. The discussions between the different parties involved for this risk focus on understanding the cedent’s strategy.
It is in the interest of both the cedant and the reinsurer to know all the details about the risk and have all the information required to make decision. Furthermore, through a special acceptance that doesn’t alter the portfolio profile too much, the reinsurer will then better understand the major risks covered in the treaty.
Even if agreement has been given, it is still possible to be more vigilant and remain informed as to whether the insurer’s underwriting guidelines are being complied with.
Conclusion
Now you are an expert on the special acceptances.
Let’s now have a look with Sylvie at single risks in life business and, therefore, at the underlying medical selection.
Thanks for your attention!
Bye for now 👋
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