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7/44 M97/February 2018 Reinsurance

Clauses used in proportional wordings
• The cession clause sets out the nature and the main terms of the proportional reinsurance, and imposes a cession
limit and a cession retention, which may or may not be protected by other reinsurance.
• The accounting clause requires the reinsured to prepare and dispatch periodic accounts to the reinsurer. It states
when accounts have to be presented to the reinsurer, what details have to be included in the accounts and when
money should be rendered to the reinsured in respect of those accounts, or vice versa.
• The premium clause provides that the reinsured will pay the reinsurer its proportionate share of the original gross
(or net) premiums received by the reinsured on business covered by the reinsurance agreement.
• The commission clause sets out how much commission is to be paid by the reinsurer to the reinsured and when it
is to be paid. There are two basic types of commission: ceding commission and profit commission.
• The claims clause deals with the notification and settlement of all losses to the treaty; claims are paid either
individually as cash losses, or collectively as part of the periodic rendering and settlement of accounts.
• The portfolio transfer clause is concerned with the transfer of liability for pre-existing business, a portfolio, from
one set of reinsurers to another.
• The parties may agree to the retention by the reinsured of premium and/or loss reserves (or deposits). The
premium reserves (or deposits) clause allows a reinsured to retain additional premium by requiring the reinsurer to
deposit a fixed proportion of prior written premium. The loss reserves (or deposits) clause allows the reinsured to
establish reserves for the reinsurer’s proportion of amounts outstanding to the treaty.
Clauses used in non-proportional wordings
• The basis of the reinsurance contract:
– on an RAD basis, reinsurers agree to assume liability for claims on risks or original policies attaching during the
reinsurance period;
– on an LOD basis, reinsurers agree to assume liability for claims occurring during the reinsurance period,
irrespective of the inception dates of the original policies giving rise to the claims;
– on a losses discovered or claims made basis, reinsurers agree to assume liability for losses that were discovered
by, or claims that were notified to, the insurer during the reinsurance period.
• The UNL clause describes the loss to which the treaty limits (and deductibles) are applied. The UNL is the sum
actually paid by the reinsured in settlement of losses or liability after agreed deductions. Those agreed deductions
may or may not include recoveries from other reinsurances. Reference copy for CII Face to Face Training
• The hours clause limits the individual losses arising from one event (or catastrophe) that may be aggregated by
reference to peril, time and, on occasion, geography.
• The reinstatement clause limits the amount of cover by specifying the number of times the limit may be reinstated.
Absent such a condition, there is no limit.
7 • The claims clauses address:
Chapter – reinsurers’ obligations in relation to the reinsured’s loss settlements (that is, original loss payments), and what
– the notification (or reporting or advice) of losses and the provision of related information to reinsurers;
the reinsured must demonstrate to reinsurers in relation to its settlements to trigger those obligations (loss
settlements clauses); and
– reinsurers’ rights of involvement in the management and/or determination of the original claim.
• The salvage and subrogation clause sets out how recoveries from third parties are to be distributed between the
reinsured and the reinsurer.
• The currency fluctuation clause enables the parties to share any fluctuation in the value of the currency of the
original loss between the contract’s inception date and the loss settlement date.
• The index clause adjusts the limit and deductible by reference to an index to take into account inflation over a period
of time.
• The aggregate extension clause allows a reinsured to present as one loss, separate and unrelated losses which it
covered on an aggregate basis under the terms of the original policy.
• The claims series clause extends the cover provided by a casualty treaty to a ‘claims series event’, enabling all
claims from a specific common cause which involve one original insured to be aggregated for the purposes of
recovery.
• The sunset clause requires the reinsured to notify claims within a certain period beyond which the contract ceases
to respond.
Treaty exclusions
• An exclusion is an express term of a contract that limits or reduces the extent of cover provided by that contract.
Typically, they exclude un(re)insurable risks or risks reinsured elsewhere.
• A reinsurer has the burden of proving that a particular loss falls within an exclusion.
• Nuclear, pollution, war and terrorism exclusions are common to all forms of proportional and non-proportional
reinsurances.