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Chapter 7 Contract wordings 7/39

Example 7.2
A reinsured may agree to retain an aggregate amount of paid losses equivalent to 10% of net earned premium
income, otherwise recoverable under a particular layer of excess of loss reinsurance. This amount (or percentage)
may sit above 35% of net earned premium income such that reinsurers pay losses recoverable under that layer of
excess of loss reinsurance up to an aggregate amount equivalent to 35% of net earned premium income and above
45% of net earned premium income, subject to an upper limit.

Reinforce
Before you move on, ensure you know how the liability clauses listed are used.

D11 Miscellaneous

D11A Simultaneous settlements clause
This clause requires reinsurers to pay the reinsurance claim at the same time as the reinsured pays the
insurance claim.
To facilitate this payment, the reinsured often agrees to give at least two weeks advance notice of the
proposed settlement dates for the original claims.
Consider this…
Why would an insurance company desire this?

D11B Projected payments
A related provision enables a reinsured to recover from the reinsurer on the basis of anticipated or
projected payments to its original policyholders over a particular period.

Whether in the reinsurance contract itself as, for example, the loss collection clause, or articulated as a
claims handling arrangement in the subscription agreement section of the MRC, this provision is
occasionally found in non-marine catastrophe excess of loss contracts. Its purpose is to help a reinsured Reference copy for CII Face to Face Training
with its cash flow in the immediate aftermath of a major catastrophe when significant sums are being
paid out over a short period of time, and the reinsured would prefer to avoid the usual time lag between
submitting collection notes and reimbursement.
Payments are made by reinsurers on the basis of the reinsured’s anticipated or projected (insurance)
A high degree of trust
payments and adjusted, if necessary, once the spike is over. Further, it is usually agreed that all monies between the parties is Chapter
paid remain those of reinsurers until such time as the reinsured pays its policyholders, and any interest essential
earned in the meantime accrues to reinsurers. A high degree of trust between the parties is essential. 7
Be aware
In the current soft market, the catastrophe claims settlement clause was introduced in early 2017. Property
reinsurers now agree to advance monies on request up to a percentage of the reinsured’s ultimate loss estimate, if
considered reasonable.

A copy of the catastrophe claims settlement clause can be found in appendix 7.6 on RevisionMate.

E Treaty exclusions

In this context, exclusions (or exceptions) are express terms of the treaty that reduce the extent of cover
which, but for the exception, would be provided by the treaty. In other words, exclusions state what a
treaty does not cover. The reasons for the main treaty exclusions include:

• Some risks are considered un(re)insurable (e.g. nuclear or terrorism risks). In other words, the risks of
loss are considered too great, in terms of frequency or severity or both, to be commercially acceptable
to the reinsurer.
• Other risks are, for whatever reason, considered outside the scope of the reinsurance (for example,
inwards reinsurance, assigned risks or market pools).
• Other risks are reinsured elsewhere, for instance, a non-marine property policy would be expected to
exclude marine and aviation property losses.
• Alternatively, a reinsurer may exclude risks relating to specific territories or perils (e.g. mould).