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7/34 M97/February 2018 Reinsurance

To calculate the amount of the loss to be paid in the contract currency (for example, sterling), use this
three-stage process:

Convert the retention and limit of liability into the currency of
loss at the rate of exchange existing at the treaty inception date

Calculate the amount of the loss in excess of the currency of
loss retention but below the currency of loss limit of liability

Convert that amount into the contract currency at the rate of
exchange existing at the date of settlement by the reinsured

An example currency fluctuation clause is set out below:
In the event that the Reinsured sustains losses in a currency other than the currency stated in the Slip, the
Reinsurers’ liability shall be calculated as follows:
The retention of the Reinsured and the liability of the reinsurers as expressed in the currency
stated in the Slip shall be converted into the currency concerned at the rates of exchange utilised
by the Reinsured in its books at the inception date of this contract.

And
the balance of any loss payment in excess of the Reinsured’s retention shall be converted from
the currency in which the loss was settled into the currency stated in the Slip at the rate of
exchange as used by the Reinsured and ruling on the date or dates of settlement of the loss by
the Reinsured. Reference copy for CII Face to Face Training

In the event of losses being sustained by the Reinsured in respect of the same loss occurrence in more
than one currency, the retention of the Reinsured and the limit of liability of the Reinsurers shall be
apportioned between the various currencies, in the proportion that each currency bears to the total loss
calculated by converting each currency into the currency stated in the Slip at the rates of exchange as
indicated above. The balance of any loss payment in each original currency in excess of the Reinsured’s
7 retention in each currency apportioned as above shall be converted into the currency stated in the Slip at
Chapter the rate of exchange used by the Reinsured and ruling on the date or dates of settlement of the loss by the
Reinsured.’

Question 7.8
How much can the reinsured recover from its reinsurers under a casualty excess of loss treaty with a limit and
deductible of £1m in respect of an original claim payment of A$2.6m? The rate of exchange at inception was 2.5,
and at payment 2.0 A$ to sterling. The treaty contains a currency fluctuation clause.