Reinsurance Tutorials #3 - Season 2
The reinsurance contract formalizes the agreement between the Reinsurer and the Reinsured.
In order to avoid any disputes, the terms and conditions of this agreement must be expressly and clearly written.
The clearer they are the less they will be subject to interpretation.
Therefore, reinsurance contract wordings, even placement slip wordings, must be drafted with great care. Let’s travel through these wordings! ⏬
A reinsurance contract encompasses traditionally general conditions and special conditions. Appendixes may be added.
The articulation of these wordings must be coherent. The reinsurance contract specifies that special conditions prevail over general conditions should there be any contradictions.
The clauses of the reinsurance contract vary according to the nature of the contract (proportional or non-proportional) and the line or class of business covered.
Some clauses are more specific to the nature of the treaty or of the lines of business. We will develop this in some of the other videos.
There is however a common core of clauses for all reinsurance contracts. In this common core, we distinguish between two categories of clauses: standard clauses and liability clauses.
Standard clauses are clauses that work autonomously or almost as such. These may include:
- A Claim advice/Claim notification or Claim referral clause that specifies when and how claims must be notified to the Reinsurer and may name the information and supporting documentation to be provided.
- A Right of inspection or Inspection of records clause that defines how the Reinsurer may access the Reinsured’ s records at its offices.
- An Accounts/Currency/Offset clause that defines when and how accounts should be issued, which currency is to be applied and, if applicable, the conversion to be applied and also specifies whether offset is permitted.
- An Applicable law clause that defines which law governs the reinsurance agreement.
- An Arbitration clause that rules the way arbitrators will be selected and how arbitration works if there is any irreconcilable dispute between the Reinsurer and the Reinsured.
- A Termination clause that specifies when each Party may request anticipated termination of the agreement.
- A Confidentiality clause that defines the duties of each Party to keep the agreement confidential.
- A Personal data protection or RGPD clause that specifies the duties of each Party with respect to personal data protection.
- A Sanction and embargo clause that describes the duties of each Party with respect to international sanctions.
- A Mode of execution clause that lists the way the agreement may be signed.
Of course, this list is not exhaustive. There are several other standard clauses.
Liability clauses are clauses that commit the Parties (the Reinsurer and the Reinsured). These may include:
- A Scope of reinsurance clause that defines the scope of the reinsurance coverage in terms of classes of business and geographical territories.
- A Period clause that defines the period of effect of the reinsurance agreement. It should not be confused with the period of coverage of the agreement, which may vary whether it is on risk attaching or loss occurring basis.
- A Limit of retention clause that specifies the scope of liability of the Reinsurer (retention of the Cedent, deductible, limit, share, etc.)
- An Ultimate net loss clause that lists the items to be included into the claims amount.
- A Limitations clause that defines the conditions to comply with in order to trigger coverage.
- A Loss occurrence clause that provides a definition of the covered loss. This clause will be developed in our next video.
- A Change in law clause that specifies the impact of a change of law on the Parties’ liabilities. According to this clause, reinsurance terms and conditions may be renegotiated should the change of law have a significant impact on the initial agreement.
Once more, this list is not exhaustive. There are other many clauses… which can lead us on to an even longer journey.
Each clause cannot be taken independently without consideration of the other clauses. Articulation of the whole of the clauses is key.
For example, an Exclusion clause can only be understood with respect to a Scope clause. Indeed, the aim of an exclusion is to deprive the Reinsured of the ability to trigger a specific cover.
Each clause be must negotiated and adapted to the agreement.
So, here’s some important advice: be careful of your wordings! Read your written agreement carefully!
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