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6/20 M97/February 2018 Reinsurance

C2C Brokers
The intermediary can also have a significant role to play in the reinsured’s choice of reinsurer. While the
responsibility for the selection of the reinsurer is ultimately that of the reinsured, the broker may also
rate reinsurers and, in law, will usually have an obligation to place business with reinsurers that are not
solvency or credit risks. Typically, they are also excellent sources for intelligence about the ability or
willingness of a reinsurer to pay its losses.

C2D Collateral
If a reinsurer would otherwise not meet the reinsured’s strict security requirements – whether to write
the business in the first place or perhaps to exceed internal limits on the amount of that business, the
reinsured may accept back-up security or collateral.
Refer to chapter 7, This may be achieved by including a loss reserves clause (or similar) in the contract, requiring, in effect,
section B2C for loss
reserves clause the reinsurer to capitalise incurred (not paid) claims upon notification. This may be done, for example,
by establishing a Letter of Credit, a cash advance into a trust fund or by withholding funds. So, in the
event of solvency problems, the monies are readily available to the reinsured when those claims
become due.

In some jurisdictions, the requirement to provide collateral may be a regulatory one rather than a
voluntary one, if the reinsured is to be allowed a statutory credit against its claims reserves for the
reinsurance it has purchased. Taking the USA as an example, if the particular reinsurer is authorised in
the reinsured’s state, there may be no regulatory requirement to post collateral but it may still be
required by the reinsured for reasons of common prudence. You will appreciate that providing collateral
can significantly add to a reinsurer’s cost of doing business with a particular counterparty in a particular
jurisdiction. It should also be understood that the credit risk is merely being transferred elsewhere – to a
bank, to a broker or to a trust company.

C2E Insolvency
6 To reiterate, the process of monitoring current reinsurers should continue throughout the life of the
Chapter Reinsured may wish Should a reinsurer’s financial condition deteriorate mid-term, the reinsured may wish to change carrier Reference copy for CII Face to Face Training
particular agreement(s) and for as long as obligations remain outstanding under it(them).

and it is common, in the event of a downgrade, for such a right to have been reserved in the contract. If
to change carrier
there is no express right of termination, the parties may agree to terminate in any event and, even if not,
the reinsured may be prudent to treat its participation as having been terminated and replace it.
Should a reinsurer’s financial condition deteriorate after expiry and while there are outstanding
balances, the reinsured may seek to commute those balances (that is, receiving a reduced sum and
ending the contract). Another way to reduce the credit risk is an offset clause in the reinsurance contract.
To the extent that amounts are recoverable from insolvent reinsurers, the reinsured can reduce any
payment to be made, on this or other contracts, to the reinsurer.

C2F Other considerations
In placing a reinsurance programme, reinsureds may choose to use a number of different reinsurers to
improve the overall security of the programme. Diversification by the reinsured reduces the impact of
reinsurer credit risk or of the withdrawal of capacity on, typically, annual renewal in hard markets.
Clearly, the fewer reinsurers used, the more important the security of those reinsurers to the financial
well being of the reinsured.

Question 6.6
Name two common treaty terms and conditions which could reduce the impact of reinsurer insolvency on the
reinsured’s reinsurance recoveries.