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Chapter 7 Contract wordings 7/7

A1C Facultative premium
The wording should also set out the cost to the reinsured, which is the facultative reinsurance premium
Wording should set
less commission, if applicable, and brokerage. The premium will be a percentage of the original out the cost to the
premium unless otherwise stated, and it is usual for a proportional facultative reinsurer to pay the reinsured
reinsured a commission in order to share the reinsured’s original commission and administration costs.

A1D Back-to-back

While the primary objective of an underwriter purchasing facultative reinsurance will be to ensure that
Reinsurer may
the reinsurance protection exists on the same terms and conditions (where relevant) as the direct require additional
placement, a facultative reinsurer may not wish for various reasons to give such ‘back-to-back’ cover. terms, conditions,
limitations and
Instead, the reinsurer may require additional terms, conditions, limitations and exclusions to accept the exclusions
particular risk. These additional terms, conditions etc. may be considered to fall into two broad
categories:
1. Those relating to the requirements of the reinsurer pertaining to the original policy or risk. Common
examples include the following:
• The original insurance period may differ from the reinsurance period if a reinsurer is only willing to
reinsure an insurer’s exposure to a five year constructors’ all risks policy, on an annual basis.
• The war or terrorism exclusion clause may be imposed by a reinsurer unwilling to accept the full
set of original perils.
• To reinsure a large industrial building, a reinsurer may require an operational sprinkler system.
This may mean a sprinkler warranty in the original policy or in the reinsurance contract.
• From time to time, governments impose sanctions against various countries, entities and
individuals and not wishing to fall foul of, for example, a provision prohibiting it from paying a
claim to the reinsured, a reinsurer may insist on a sanctions and embargo clause as follows:

Facultative Reinsurance Sanctions and Embargo Clause (IUA 09-049):
Notwithstanding anything to the contrary in the Policy the following shall apply:
1. If, by virtue of any law or regulation which is applicable to a Reinsurer at the inception of this Policy or Reference copy for CII Face to Face Training
becomes applicable at any time thereafter, providing coverage to the Reinsured is or would be
unlawful because it breaches an embargo or sanction, that Reinsurer shall provide no coverage or
benefit and have no liability whatsoever nor provide any defence to the Reinsured or make any
payment of defence costs or provide any form of security on behalf of the Reinsured, to the extent
that it would be in breach of such law or regulation. Chapter
2. In circumstances where it is lawful for a Reinsurer to provide coverage under the Policy, but the
payment of a valid and otherwise collectable claim may breach an embargo or sanction, then the 7
Reinsurer will take all reasonable measures to obtain the necessary authorisation to make such
payment.
3. In the event of any law or regulation becoming applicable during the Policy period which will restrict
the ability of a Reinsurer to provide coverage as specified in paragraph 1, then both the Reinsured and
the Reinsurer shall have the right to cancel its participation on this Policy in accordance with the laws
and regulations applicable to the Policy provided that in respect of cancellation by the Reinsurer a
minimum of 30 days notice in writing be given. In the event of cancellation by either the Reinsured or
the Reinsurer, the Reinsurer shall retain the pro rata proportion of the premium for the period that the
Policy has been in force. However, in the event that the incurred claims at the effective date of
cancellation exceed the earned or pro rata premium (as applicable) due to the Reinsurer, and in the
absence of a more specific provision in the Policy relating to the return of premium, any return
premium shall be subject to mutual agreement. Notice of cancellation by the Reinsurer shall be
effective even though the Reinsurer makes no payment or tender of return premium.

2. Those relating to the requirements of the reinsurer pertaining to the conduct between the parties.
Common examples include the following:
• Clauses dealing with the notification and settlement of claims.
As facultative policies are on individual risks, the underwriting process and the claims handling
process are far more involved. It is common to incorporate a claims notification, cooperation or
control clause, imposing varying requirements on the reinsured and, in the latter instance,
reserving to the reinsurer the right to control settlements. These clauses are discussed in greater
detail in section D6.