Reinsurance tutorials #31
What is loss occuring?
A reinsurance contract specifies its period of effect: date of inception and date of termination. But the period during which the treaty produces its effects is not to be confused with the period of coverage. The period of coverage determines the period during which the Reinsurer will be responsible for the claim in respect with the policies or risks ceded during the period of effect of the treaty. This period of coverage might be loss occurring, risk attaching or accounting year.
“Loss occurring” treaty means that the Reinsurer only pays the Ceding party for all losses incurred during the reinsurance contract period, regardless of when the policy's insurance generated the losses.
Let’s take an example:
- An insurance policy is issued for the period of June 1st 2019 to May 31st 2020.
- The Ceding party purchased a reinsurance contract running from January 1st 2019 to December 31st 2019 on a loss occurring basis.
- A loss incurred on December 29th 2019, it will be covered by the Reinsurer.
- But if it occurred on January 5th 2020, it won’t be covered.
Reinsurance based on loss may be triggered for claims that are notified many years later. For instance, if an employer is found liable due to damages suffered by an employee who was exposed to asbestos many years ago.
As a consequence, with a loss occurring basis contract, the Reinsurer may be entitled to pay for many years, even after the termination of the treaty.
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