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7/6 M97/February 2018 Reinsurance

An alternative reinsuring clause referencing the UNL follows:
In consideration of the premium to be paid to the Reinsurer by or on behalf of the Reinsured, subject to the
terms and conditions of this Agreement the Reinsurer shall reimburse the Reinsured to the extent that its
Ultimate Net Loss (as defined in the Ultimate Net Loss Article of this Agreement) under business reinsured
by this Agreement exceeds the Reinsured’s retention but only up to the limit of reimbursement.

The basis on which the limit and retention are to be applied must also be stated in the wording, for
example, any one claim, or any one accident, or any one loss. In each case, there should be a definition.

The reinsured will also have incurred costs and expenses in handling the original claim, and the wording
Wording should state
how those costs and should state how those costs and expenses are to be divided between the parties. In practice, the costs
expenses are to be are shared on either a ‘costs in addition’ or ‘costs inclusive’ basis. The allocated costs and expenses are
divided between the
parties merely added to the indemnity claim for the purposes of applying the limit and deductible on a ‘costs
inclusive’ basis. They are pro-rated across each party’s share of the indemnity claim, and paid in
addition to the limit on a ‘costs in addition’ basis.
Example extracts from standard International Underwriting Association (IUA) clauses follow:

The IUA 01-024 (formerly NP82): ultimate net loss (costs inclusive) clause:
The Reinsurer shall indemnify the Reinsured to the extent of the Reinsurer’s participation hereunder in
respect of any loss and interest which falls within the terms and conditions of the original policy and
Allocated Loss Expenses arising therefrom. In calculating such amount of indemnity any salvages
recoveries and payments from third parties, including any recoveries from other reinsurers, whether
collected by the Reinsured or not, shall be taken into account.

The IUA 01-025 (formerly NP83): ultimate net loss (costs in addition) clause:
The Reinsurer shall indemnify the Reinsured to the extent of the Reinsurer’s participation hereunder in
respect of any loss and interest which falls within the terms and conditions of the original policy. In
calculating any such amount, any salvages recoveries and payments from third parties, including any
recoveries from other reinsurers, whether collected by the Reinsured or not, shall be taken into account. Reference copy for CII Face to Face Training
The Reinsurer shall pay its proportion of Allocated Loss Expenses arising in respect of any such loss and
interest. The amount to be allocated to this layer shall be in the same proportion as the loss and interest
payable by this layer bears to the total net loss and interest payable by the Reinsured, subject to the
Reinsurer’s total payment not exceeding [percentage to be expressly agreed/provided]% of the layer limit.‘
7 In each instance, ‘Allocated Loss Expenses’ shall include reasonable adjustment expenses and legal costs
Chapter and expense of litigation incurred by the Reinsured when settling claims covered under the original policy.

Salaries of employees, management expenses and other overhead expenses of the Reinsured shall not be
included.

Question 7.1
Three claims have been made under a facultative excess of loss reinsurance. The reinsurance has a limit of
£1,000,000 and a retention of £1,000,000. In each case, £300,000 of costs and expenses has been incurred in
defending the claim and the reinsured has been found liable under the original policy in the amount of that claim.
What is recoverable by the reinsured on:
1. a ‘costs inclusive’; and
2. a ‘costs in addition’, basis?
Claim A: £1,000,000

Claim B: £1,500,000
Claim C: £2,000,000

We now look at other important features of a facultative reinsurance contract.