Reinsurance tutorials #14
What is cancellation?
Cancellation is an ability to cancel a participation in the context of an insurance or reinsurance contract before it is due to expire. The contract period is normally defined in the contract, and if a contract is cancelled by one of the parties before the expiry date, it is then called cancellation of the contract.
A contract may have a cancellation clause which permits the contracting parties to cancel it before it is due to expire, and may also stipulate the conditions for cancellation which can be performed by sending a cancellation notice. The clause may provide for a return of premium in respect of the unused portion of the contract. The cancellation of the contract on the continuous contracts is supported by this notice of cancellation.
What is a continuous contract?
A continuous contract is a contract that remains effective until both parties mutually agree to terminate it, or until one of the parties sends the other a notice of cancellation. A notice of cancellation is a means to notify the other participants of the intention to withdraw from the treaty. This notice is used only for withdrawal from continuous reinsurance contracts, which are typically eligible for cancellation or renewal once a year. A notice of cancellation also allows all parties the periodic opportunity to assess the contract, and thus either renew or withdraw from it. Most reinsurance arrangements allow for this assessment once a year. Both the reinsured entity and the reinsurer have the right to issue a notice of cancellation. Doing so gives them a 90-day window in which they can formally cancel the contract.
The accounting perspective when cancelling a reinsurance contract is also a very important topic. The cancellation of a reinsurance contract in accounting can take place in 2 ways: first on a run-off basis, which means that the liability of the reinsurer under policies, which became effective under the treaty prior to the cancellation date, shall continue until the expiration date of each policy. The Second way is cut-off basis, which means that the liability of the reinsurer under policies, which became effective under the treaty prior to the cancellation date, shall not continue after said cancellation date.
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