Reinsurance Principle and Practice CPCU

8/20/2019 Reinsurance Principle and Practice CPCU

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Arbitration Clause•

Arbitration process will be used to resolve disputes between the partiesto the treaty

• Typically conduct by a panel of disinterested 3rd parties who arefamiliar with insurance and reinsurance practices

• Arbitration required – The parties must use an arbitration panel if they are unable to settle a dispute

– The stipulation “ As a condition precedent to any right of action hereunder…”means that before either party can take legal action, the party must bearbitrated

• Time Limits – !pecify that arbitrators must be appointed within a speci"ed time limit usually

3# days

– The parties have a prescribed time within which to present their cases to thearbitration panel

– The panel has authority to approve time e$tensions to allow all materials andwitnesses statement to be presented


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Arbitration Clause

• Arbitrators’ qualifcation – %ust active or retired e$ecutives of insurers or reinsurers

– “e$ecutive” mean a senior o&cer, a vice president orsomeone with high rank• A person has not actively participated in reinsurance treaty

negotiations and practices until reaching a senior level

• An e$ecutive has a broad enough background in insurancepractices to consider both sides of a dispute

– %ust be disinterested in the arbitration proceedings

– They usually indicate any involvement they had or havewith either of the parties to the arbitration, particularly ifthey served as appointed arbitrators in a previousarbitration


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Arbitration Clause• Rules o Procedure and Evidence

– The arbitrators are “relieved of all 'udicial formality and shallnot be bound by the strict rules of procedure and evidence” the panel should make its decision based on insurance andreinsurance custom and usage

– Arbitrators are not 'urists but specialist in the sub'ect givingrise to the dispute

– Arbitrator should use their best 'udgment to determine theagreement(s original intent and rule accordingly

• The decision

– The decision of any two arbitrators is binding on both partiesand that any court having 'urisdiction can enter the 'udgment

– Arbitration panel does not have power to enforce its decision


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)*set Clause

• Allow insurer and reinsurer to o*set balancesdue to each other

• )*sets can apply to premium and losses

between the same parties within a singletreaty +narrow o*set or across multipletreaties +broad o*set

• -road o*set would allow the primary insurer

and reinsurer to consider all balances due toone another from all their reinsurance treatiestogether in determining the net amount owed


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.rrors and )missions Clause

• /either party is relieved from itsobligations under the treaty because of aninadvertent error or omissions

• %istakes such as failing to cede losse$posures that should have been ceded orceding loss e$posures that do not fallwithin the reinsurance treaty(s scope, are

not a basis to void the treaty as long asthese mistakes are corrected whendiscovered


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Common 0einsurance Treaty Clauses0e1uired 2nder !tate 0egulation

• !everal clauses is re1uired inreinsurance contracts by state regulatorsso that primary insurers can 1ualify for

"nancial statement credit for reinsurance – !ervice of suit clause

– nsolvency clause

– ntermediary clause

– 2nauthori4ed reinsurance clause

– 5unding clause


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!ervice of !uit

• Allows the primary insurers to seek a legal remedy froma court in a convenient 'urisdiction when the reinsurance

treaty involves an international reinsurer that is notlicensed or otherwise authori4ed to sell reinsurance in 2!

•

Allows the reinsurer to commence a suit in any court ofits choosing in the 2! that has 'urisdiction

• 6esignates an agent for service of purpose, usually is a

law "rm that represents alien reinsurers +who isdomiciled in a country other than the 2! )0 could be an

individual or the insurance commissioner in the primaryinsurer(s state of domicile

• 0e1uires the reinsurer to abide by the "nal court

decision, allowing, however, for an appeal


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nsolvency Clause

• ndicates that the primary insurer(sbankruptcy does not a*ect does not a*ectthe reinsurer(s liability for losses under the

reinsurance agreement• tems are speci"cally addressed in the clause

– 7ithout diminution

– /otice re1uirements

–0ight to investigate and denied

– 0eimbursable e$penses

– 0einsurance proceeds payable

Reinsurance Principle and Practice CPCU

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