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Chapter 7 Contract wordings 7/33

The clause applies in circumstances where:
• the reinsured has losses under more than one policy and/or contract but from the same occurrence or
event; and
• such policies and/or contracts attach to different treaty periods.
The result is that the amount to be retained by the reinsured under a particular treaty is reduced to that
percentage of the retention which the reinsured’s losses on the original policies and/or contracts
incepting during the usual twelve-month treaty period, bears to the reinsured’s total losses arising out of
all the policies and/or contracts contributing to the loss. The amount to be paid by the reinsurer is
arrived at in the same manner.

In each case, it is important to be clear about the purpose of any interlocking calculation as the incurred
and paid positions will invariably differ until all of the claim files are closed.

Question 7.6
A catastrophe results in losses to a reinsurer of US$400,000 on contracts incepting in underwriting year one, and
US$1,200,000 on contracts incepting in underwriting year two. Neglecting any reinstatement premium payable, how
much can that reinsurer recover under interlocked ‘risks attaching’ catastrophe excess of loss reinsurance
programmes for those years? Each programme has a limit and a deductible of US$1m.

D8 Salvage and subrogation clause

This clause sets out how recoveries from third parties are to be distributed between the reinsured and
the reinsurer. It may also be known as a ‘third-party recoveries clause’.

An example of a typical clause where any recoveries are pro-rated across the reinsured’s entire original loss
(including relevant expenses) is set out below:
The Reinsurer shall be credited with its proportionate share of salvage (that is, reimbursement obtained or
recovery made by the Reinsured, less the actual cost, excluding salaries of officials and employees of the Reference copy for CII Face to Face Training
Reinsured and sums paid to attorneys as retainer, of obtaining such reimbursement or making such
recovery) on account of claims and settlements involving reinsurance hereunder. The Reinsured hereby
agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which was sustained by
the Reinsurer, and to prosecute all claims arising out of such rights.

Otherwise, any recoveries would typically be applied top down in accordance with the UNL clause and, Chapter
therefore, benefit reinsurers alone at least until the deductible is reached. This particular clause has the
effect of incentivising reinsureds to pursue recoveries. 7
As above, the clause will also address the reinsured’s right and/or obligation to take steps to hold third
parties responsible for any loss. Any agreement to enforce those rights to salvage or subrogation may be
subject to the proviso that, in the reinsured’s opinion, it is economically reasonable to do so.

Question 7.7
A reinsured makes a subrogation recovery of US$600,000 in relation to a loss on which it has already collected
US$250,000 from reinsurers. The limits and excess on the reinsurance contract are both US$1m. Calculate the
amount to be reimbursed to reinsurers.

D9 Currency fluctuation clause

This clause is used in treaties where the retention and limit of liability are stated in the same currency
but the original business may result in claims in another or more than one currency. The purpose of the
clause is to enable the parties to share any fluctuation in the value of the currency of the original loss
between the inception date of the contract and the date of the settlement of that loss.