Chapter 7 Clauses

Question 1

What are the common clauses to proportional and non-proportional wordings?

Answer 1

• Limitation clauses
• Premium clauses & commission clauses
• Claims clauses
• Payment clauses
• Law and dispute resolution clauses
• Miscellaneous clauses

Question 2

What is pre amble?

Answer 2

Provides a more detailed introduction to the description and purpose of the contract

Question 3

What is a limitation clause?

Answer 3

• This clause sets out the period (or term) of the reinsurance contract, it can be continuous or fixed

Question 4

What is a continuous contract?

Answer 4

A proportional contract is usually seen as continuous, meaning that it continues until terminated on notice. This does not mean it is indefinite

Question 5

What is a fixed period contract?

Answer 5

Usually a non-proportional contract, typically a year.

Question 6

What is a territorial scope clause?

Answer 6

This clause identifies the territorial or geographical scope of the reinsurance contract. Cover may also be on a worldwide basis.

Question 7

What is a special termination clause?

Answer 7

The special termination clause provides that one or both parties may terminate the agreement immediately.

Question 8

What are the four main events in which a contract may be terminated?

Answer 8

• Insolvency of a party
• Introduction of new legislation
• A material change in ownership
• War

Question 9

What are the effects of termination for non prop & prop agreements?

Answer 9

• Non prop may be cancelled outright, apart from losses that occurred prior to the termination.
• Proportional may be terminated on a portfolio transfer or run off basis

Question 10

What is meant by portfolio transfer basis / run off basis?

Answer 10

• If the portfolio is transferred, the outstanding liabilites and run off premiums are calculated and transferred over to the new year of account
• Run off means the reinsurer is liable until the natural expiration or cancellation of the original policies

Question 11

What is a special acceptance clause?

Answer 11

• This clause notes that a reinsured may submit business to the reinsurer that is not automatically covered by the reinsurance contract.

Question 12

What are the 3 examples of a payment clause?

Answer 12

• Currency clause
• Late payment clause
• Loss reserve clause

Question 13

What is a currency clause?

Answer 13

• These clauses establish the relationship between the original premium and claims transaction compared with the reinsurance premium / claim transaction

Question 14

What is a late payment clause?

Answer 14

This clause requires the defaulting pay to pay interest on any late payments.

Question 15

What is a loss reserve clause?

Answer 15

This clause allows the reinsured to establish reserves for the reinsurers proportion of amounts outstanding to the treaty.

Question 16

What are the forms of reserve clause?

Answer 16

• Funds withheld
• Cash advances
• Letter of credit - a document issued by a mutually agreed bank at the request of the reinsurer to the reinsured.

Question 17

What is a law and distribution clause?

Answer 17

This clause records the parties choice of law and tribunal for the reinsurance contract

Question 18

What is a dispute resolution clause?

Answer 18

This clause sets out how the parties have agreed to go about resolving any disputes that arise between both parties

Question 19

The dispute resolution clause is split into two, what are they?

Answer 19

• Arbitration clause
• Remediation clause

Question 20

What is an arbitration clause?

Answer 20

This clause is found in brokered reinsurance contracts, and sets out how both parties arbitrate between one and other before litigation

Question 21

What is a mediation clause?

Answer 21

• This clause sets out that a trusted third party attempts by various means to broker a settlement between the parties. This emphasises a structured negotiation away from strict legal rules and procedures.

Question 22

What are some examples of miscellaneous clauses?

Answer 22

• Access to records clause
• Underwriting policy clause
• Errors and omissions clause
• Extra contractual obligations and excess of policy limits clause
• Insolvency clause

Question 23

What is an access to records clause?

Answer 23

• This clause gives the reinsurer the right to examine or inspect the reinsureds books and records that pertain to the reinsurance contract

Question 24

What is a underwriting policy clause?

Answer 24

This clause requires the reinsured to seek the reinsurers approval to significant change in its underwriting policy.

Question 25

What is an errors and omissions clause?

Answer 25

The purpose of this clause seeks to ensure that any inadvertent errors, omissions or delay in complying with the reinsurance agreement are remedied immediately upon discovery without any impact to the treaty

Question 26

What is an extra contractual obligation (ECO) clause?

Answer 26

This clause extends the scope of the treaty to damages arising from the reinsured's bad faith or negligence in handling claims, under policies subject to the treaty.

Question 27

What is excess of policy limits (XPL) clause?

Answer 27

This clause extends the scope of the treaty to original loss in excess of the original policy limit, where this arises from the reinsured's bad faith or negligence in handling claims under policies subject to the treaty?

Question 28

What is the difference between an ECO & XPL clause?

Answer 28

The difference is that the loss or liability that is subject of the XPL clause is that it would be covered under the original policy but for the paucity of limit whereas the ECO clause falls out outside the original policy.

Question 29

What is an insolvency clause?

Answer 29

This clause sets out the effect of the reinsureds insolvency will have on the reinsurance contract. Therefore, the reinsurer would have to pay the full claim in this situation

Question 30

What is an offset clause?

Answer 30

An offset clause allows the parties to offset any balance or amount due from one party to the other under a particular reinsurance contract or any others between the parties

Question 31

What is a co-insurance clause?

Answer 31

- This clause states the proportion of the particular contract that the reinsured agrees to retain 'net & unreinsured'. the purpose of the clause is to make certain that the reinsured remains interested in economic claim settlement.

Question 32

What is a boiler plate clause?

Answer 32

Standard clauses with little reinsurance content to them

Question 33

What is a notice clause?

Answer 33

Sets out how notice will be given, i.e written

Question 34

What is a cession clause?

Answer 34

Used in prop wording. Used to clarify the nature and main terms of the treaty

Question 35

What is a cession limit?

Answer 35

The agreement to accept a fixed proportion of the business that falls within the terms of the contract subject to the overall limit.

Question 36

What is a cession retention?

Answer 36

The reinsured agrees to retain an amount for its own account. It may allow for the retention to be projected by another means of reinsurance.

Question 37

What is a record of cessions clause?

Answer 37

Prop. This clause requires the reinsured to maintain records of all cessions to the contract, including renewals and amendments.

Question 38

What is a commencement and termination clause?

Answer 38

Prop. This clause sets out when cover under the reinsurance contract commences and terminates.

Question 39

Commencement is usually arranged on a...

Answer 39

Underwriting year basis or an accounts year basis

Question 40

A proportional treaty on an 'accounts year' basis covers all losses on policies issued or renewed during a particular basis? True of false?

Answer 40

False

Question 41

What is an accounting clause?

Answer 41

Prop. This clause requires the reinsured to prepare and dispatch periodic accounts to the reinsurer. The accounting period i.e yearly etc

Question 42

What is a premium & commission clause?

Answer 42

- Premium clause - states that the cessions to the treaty are subject to the same terms and conditions of the original business. It states that the reinsured will pay the reinsurer its proportionate share of the original gross (net) premium. - Commission clause - sets out how much commission will be paid to the reinsured.

Question 43

What is a claims clause? 3 clauses

Answer 43

prop. These clauses deal with the notification and settlement of all losses to the treaty. Claims information - Sets out the required level of detail to be provided to the reinsurer and when it should be provided. Claims settlement clause - Sets out how the reinsurer will settle a claim. follows the fortunes. Payment of claims clause - either straight away or quarterly. Purpose is to avoid cash flow problems.

Question 44

What is a portfolio transfer clause? 3 parts

Answer 44

prop. Concerned with the transfer of liability for pre-existing business from one set of reinsurers to another. Premium portfolio - transfer of funds from one to another. Loss portfolio - Incoming reinsurers assume liability for all outstanding losses. Portfolio transfer clause - will specify where there is premium portfolio assumption / withdrawal / loss portfolio assumption / withdrawal.

Question 45

Premium and loss reserves?

Answer 45

prop. Parties may agree to the retention of premium / loss reserves by reinsured. Remember chapter 4.

Question 46

Loss participation clause?

Answer 46

Prop. Requires the reinsured to participate as a co-reinsurer if a stated loss ratio existed.

Question 47

Event limitation clause?

Answer 47

Prop. Limits the amount of claims recoverable under the treaty for a defined event to a stated monetary amount.