The document discusses various clauses commonly found in reinsurance contracts. It describes clauses related to facultative and treaty wordings, including clauses for proportional and non-proportional treaties. For proportional treaties it covers cession, accounting, premium, claims, and portfolio transfer clauses. For non-proportional treaties it discusses basis of cover, premium, ultimate net loss, limits/deductibles, reinstatement, claims, and currency fluctuation clauses. The document provides details on the purpose and content of these standard reinsurance contract clauses.

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Reinsurance CII p97
Chapter 8:
Contract Wordings

2. Table of Contents
Introduction
Main features of facultative and treaty wordings
Clauses common to proportional and non-proportional wordings
Clauses used in proportional wordings
Clauses used in non-proportional wordings
Treaty exclusions
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3. Introduction
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Wordings are the signed agreements which evidence contracts of
reinsurance between the parties.
Clear in expression Avoid ambiguity
Reflect the
intention

4. Introduction
An incomplete statement of the parties.
The careless use of definitions and defined terms.
Illegible annotations or attachments.
Clauses added by “cutting and pasting” from other documents that have not
been properly integrated into the new wording, adding meaningless words or
phrases to the wording
The inclusion of incompatible or contradictory clauses.
Misstatements in relation to which terms and conditions apply to different sections of
cover.
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Common problems associated with contract wordings:

5. Main features of facultative and treaty wordings
• The insurer(s)
• The reinsurer(s)
The parties
•Each of the parties should be clearly described and, if not individually
stated, should be readily identifiable from the definition provided.
• An entity: described by its name and address, or by its relationship
with another entity.
• Company: defined in law by its number not name
Description
•What the parties have agreed to
• Facultative reinsurance: the reinsured's interest in a particular
insurance contract
• Treaty reinsurance: a particular account or book of insurance business
Subject matter of
the reinsurance
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6. Facultative Wording
Follow the terms and conditions of the underlying policies.
Might contain specific clauses that limit the coverage under the
reinsurance wording to less than the original insurance contract.
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7. Facultative Wording
From case law, four basic summations in relation to underlying
insurance terms and conditions:
o If there is a misunderstanding as to the amount of liability passed to the reinsurer
from the insurer, the insurer gains the benefit of doubt if it can be reasonably
assumed that their insurer could have foreseen this additional expenses.
o Insurers extending the liability under the original insurance after the conclusion
of the facultative policies cannot increase their insurers liability.
o An original policy will not be regarded as being incorporated into a reinsurance
agreement other than where the terms in question are reasonably consistent or
compatible with the general requirements of the reinsurance agreement.
o A facultative reinsurer will have to follow the law of the original policy to provide
business efficacy to the contract.
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Note: Case law has been inconsistent, tendency that each case is
determined on its own merits.

8. Treaty Wording
Full (or complete) wording:
Details within its body, within the text, all
of the variables peculiar to the parties’
actual agreement.
The variables will include names, period,
premium, limit, excess, geographical scope
and so on.
Schedule-based wording:
Relies on a core wording and a statement
of variables (or schedule),
Variables are incorporated into the core
wording by individual reference within
the wording from a particular part, or
section of the schedule.
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9. Clauses common to proportional and non-
proportional wordings
Limitation
clauses
Period
Territorial scope
Special termination
(or cancellation)
Special acceptances
Premium
clauses.
Claims clauses.
Payment
clauses
Currency clauses
Late payments
Loss reserves
Law and dispute
resolution clauses
Miscellaneous
clauses
Access to
records
Underwriting
policy
Errors and
omissions
ECO and XPL
Insolvency
Offset
Co-reinsurance
Boiler plate
clauses
Notice
Intermediary
Termination of
intermediary
Confidentiality
Amendments
and alterations
Severability
Entire
agreement
Non-waiver
Several liability
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10. Preamble
The purpose of the preamble is to establish, the identity of the parties
between whom the agreement is made.
Include all the parties to the contract including, where relevant,
subsidiary companies and branch companies.
Define what the parties to the contract are to be called through out the
duration of the contract, e.g., reinsurer and reinsured.
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11. Limitation Clauses
•Continues contract : proportional treaty
•Fixed period contract : non-proportional treaty
•Parties will reserve the right of a party to cancel (or terminate) the agreement on written notice.
Period
•This clause will determine the geographical scope of the treaty.
•It clarifies whether the treaty is limited to risks written in a particular territory or whether cover
is granted on a more world-wide basis.
Territorial scope clause
•Portfolio transfer: Continuous proportional contract, outstanding liabilities (claims and return
premiums) and run-off premiums are calculated and transferred over to the new year of account
•Run-off: The reinsurer remains liable for all losses arising from policies covered by the contract
until their natural expiration or cancellation
Special termination (or cancellation) clause
•Notes that a reinsured may submit business not covered by the reinsurance contract to the
reinsurer for special acceptance under the contract.
•May require the approval of all reinsurers, more usually, only the leader.
•Provide that all previous special acceptances are carried forward automatically from predecessor
contracts.
Special acceptances clause
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12. Payment Clauses
•Set out the relationship between the currency of the original premium and/or claim transactions,
and the corresponding reinsurance (premium and/or claim) transactions.
•In situations where claims payments may be required in a combination of currencies, the clause
in a non-proportional treaty should require the deductible and limit to be apportioned in the
proportion that the amount of each currency bears to the total amount of the reinsured’s loss.
Currency Clauses
•Requires the defaulting (or debtor) party to pay interest on any amounts past due under the
contract.
•AKA a remittance clause
Late Payments Clause
•Allows the reinsured to establish reserves for the reinsurer’s proportion of amounts outstanding
to the treaty.
•Also known as a loss funding or an unauthorized reinsurance clause.
•Form of reserve clause:
•Funds withheld; Self-explanatory
•Cash advances (also known as ocas, that is, outstanding cash or claims advances); Self-explanatory
•Letter of credit (LOC), provided the chosen method is acceptable to the regulatory authority; Not self-
explanatory.
Loss Reserve Clause
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13. Miscellaneous clauses
•Gives the reinsurer the right to examine or inspect the reinsured books and records, pertaining to
the reinsurance contract
•Also known as the right of inspection clause
•The right to inspect lasts if either party has a claim against the other and may continue long after
the original period of the agreement.
•Requires reinsurers to enter into a confidentiality agreement prior to inspecting the books and
records.
Access to Records Clause
•Requires a reinsured to seek a reinsurer’s approval to significant change in its underwriting
policy.
•Purpose: to prevent the reinsured eroding or otherwise changing the nature of the original
bargain struck between the parties.
Underwriting Policy Clause
•Seeks to ensure that any inadvertent errors, omissions or delay in complying with the terms and
conditions of the treaty are remedied immediately upon discovery and without any impact to the
treaty beyond that of ordinary rectification.
Errors and Omissions Clause
•In the event of the in solvency of the reinsured, the liability of the reinsurer shall be determined
as if the reinsured had not gone into liquidation, subject to any rights of set-off.
Insolvency clause
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14. Miscellaneous clauses
•Typically found in wordings where the reinsured is domiciled in the USA.
•ECO: 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.
•The court has made an award against the insurer/reinsured outside of the insurance relationship.
•XPL: extends the scope of the treaty to original loss in excess of the original policy limit, arising
from the reinsured’s bad faith or negligence in handling claims under policies subject to the
treaty.
•The court has set aside the original policy limit, awarding a claim amount in excess of that limit.
Extra contractual obligations (ECO) and Excess of policy limits (XPL) clauses
•Allows the parties to offset any balance or amount due from one party to the other under
a particular contract, whether acting as reinsurer or reinsured.
Offset clause
•States the proportion (or percentage) of the particular contract that the reinsured agrees
to retain ‘net and unreinsured.
•In proportional, it is more usually ; described as co-participation.
• In non-proportional, a reinsured assumes an amount or percentage of the reinsurance
cover (or layer), in addition to the deductible.
Co-reinsurance clause
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15. Boilerplate clauses
•How notice required by the agreement shall be given,
Notice Clause
•Identifies, and provides contact details for, any intermediary or broker on the
contract.
Intermediary Clause
•Provides that the reinsured may terminate the role of the intermediary at any time
during the contract by giving written notice.
Termination of Intermediary Clause
•Prohibits the reinsurer from disclosing confidential information to another unless it
falls within prescribed categories, or the parties otherwise agree.
Confidentiality Clause
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16. Boilerplate clauses
•States the means by which the parties are entitled to make changes to the contract.
Amendments and Alterations Clause
•Ensure that a provision which is found to be invalid, illegal or otherwise
unenforceable does not imperil the entire contract.
Severability Clause
•Limits the parties’ rights and obligations to those set out in the contract and
specified documents alone.
Entire Agreement Clause
•Notes that the failure by one party to insist on the other's compliance with a
particular provision of the contract does not constitute a waiver (o ra giving up)of
that right or remedy.
Non-waiver Clause
•Explains that a reinsurer’s liability is limited to the extent of its participation
Several Liability Clause
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17. Clauses used in proportional wordings
Cession Clause
Record of Cessions
Clause
Accounting Clause
Premium Clauses Claims Clauses
Portfolio Transfer
Clause
Premium and Loss Reserves
(Or Deposits) Clauses
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18. Cession Clause
Sets out the nature and the main terms of the proportional reinsurance.
Also known as the “reinsurance clause” or the “treaty detail”.
First part of the clause confirms the obligatory nature of the contract.
The parties will also agree that the reinsurer shall be subject to the same terms,
warranties, clauses and all other conditions as may be contained in the original
policies protected under the reinsurance.
Cession limit
Is a maximum monetary amount that may be ceded to the treaty in respect
of each risk, interest, policy or whatever basis the parties have agreed that
the limit will apply.
Cession retention
The clause may allow the retain amount to be protected by other
reinsurance or it may not.
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19. Accounting clause
Requires the reinsured to prepare and dispatch periodic accounts to the
reinsurer.
Include the following:
• The accounting period
• How close to the end of the relevant period the account has to be rendered
• How and when the account is to be confirmed and the balances settled
• Any special class of provisions, such as the rendering of separate accounts for
specified currencies.
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20. Premium clauses
Premium clause
• Provides that the reinsured will pay the reinsurer its proportionate share of the
original gross (or net)
Commission clause
• How much commission is to be paid by the reinsurer to the reinsured and when
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21. Claims Clauses
Claims information
• The extent of individual and/or summary loss information to be provided to the
reinsurer, and when it should be provided.
Claims(or loss) settlement clause
• The basis on which the reinsurer is to settle claims.
• “Follow the fortunes” clause
Payment of claims clause
• Claims are paid (or remitted) either individually as cash losses, or
• Collectively as part of the periodic rendering and settlement of accounts
• Purpose: Avoid cash flow problems inherent in the settlement of large gross
losses out of the net retained funds of the reinsured.
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22. Portfolio transfer clause
Premium portfolio
• Reinsurers: assume liability for all policies in force (that is, the premium
portfolio) at a certain date.
• The reinsured: pay reinsurers a sum of money known as an incoming premium
portfolio (or similar).
Loss portfolio
• Reinsurers: assume liability for all losses outstanding (the loss portfolio) at a
certain date.
• The reinsured: pay reinsurers a sum of money known as an incoming loss
portfolio (or similar) and,
• represents the reinsurer’s share of the estimated outstanding losses at that date.
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23. Premium and Loss Reserves (Or Deposits) Clauses
Premium reserves (or deposits) clause:
• Reinsured retain proportion of ceded premium.
• In case reinsurers unable to meet obligation
• Transfers of money by reinsurer can be delayed
• Legal requirement in some countries
• Reserves retained and released with interest
This clause makes provision for the following:
• The proportion of the ceded written premium retained by the reinsured representing the
unearned premium.
• How the reserves is to be taken (40% of each quarter premium) and when released(next
corresponding quarter year).
• Disposal of reserve in the event of termination of the treaty
• Interest payable on the amount of reserve held.
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24. Premium and Loss Reserves (Or Deposits) Clauses
Loss reserves(or deposits) clause
Legal requirement in some countries.
Amount based on the estimated loss outstanding amount at a given
date(anniversary date or quarterly accounts)
Interest on reserve amount paid to the reinsurer annually.
Both loss and premium reserves may be established by a letter of credit
from reinsurer
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25. Clauses used in non-proportional wordings
Basis of cover
clause
Premium
Ultimate net
loss (UNL)
clause
Net retained
lines clause
Limits and
deductibles
Reinstatement
clause
Claims clauses
Interlocking
clause
Salvage and
subrogation
clause
Currency
fluctuation
clause
Liability clauses Miscellaneous
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26. Basis of cover clause
Describes the necessary relationship between the period of the
reinsurance contract and a characteristic of the original insurance policy
or claim.
Together the period clause and the basis clause are known as the
“commencement clause”.
Basis on which reinsurance applies:
• Each loss each risk-risk excess of loss
• Each accident–accident or T/P XL
• Each loss occurrence–Catastrophe XL
• In the aggregate each annual period–stop loss/aggregate XL
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27. Basis of cover clause
Risks attaching during (or policies issued or RAD)basis:
Reinsurers will assume liability for any losses that affect original policies
issued or renewed by the reinsured during the period of the reinsurance.
Provided that the inception dates of the underlying policies fall within the
period of the reinsurance contract in question.
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1/5/2020 30/4/2021
Original Policy Period
Date of loss
Reinsured Period

28. Basis of cover clause
Losses occurring during (LOD) basis:
Reinsurers assume liability for all claims that have loss dates within the
period of the reinsurance, irrespective of the inception date of the
underlying policies giving rise to a claim.
For example, if our insurer had arranged protection for the period twelve
months from 1 January 2020, every claim that could attach to the
protection must have a loss date within the 2020 year.
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29. Basis of cover clause
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A A
Loss 1
B B
Loss 2 Loss 3
Reinsurance Period
Losses occurring during (LOD) basis:
In the below figure,
• Policy A incepts before the start of the reinsurance but because Loss 1 occurs
within the reinsurance period reinsurers will find themselves liable for their
proportion of the claim.
• Policy B incepts within the period of the reinsurance but extends beyond the
expiry of the reinsurance. Because Loss 2 has a loss date within the
reinsurance period, it would attach to the reinsurance policy.
• However, as Loss 3 has a loss date outside of the reinsurance period, no
liability will attach to this reinsurance even though it has occurred on a
policy that was in force during the currency of the excess of loss protection.

30. Basis of cover clause
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Loss discovered/claims made basis:
Reinsurers agree to assume liability for circumstances notified to the insurer
that fall within the period of the reinsurance.
Reinsurers’ exposure to loss is not determined by the inception date of the
original policy, or when the loss occurred, but by when the original claim was
made, or the loss discovered.
An example of this is professional indemnity protection when a claim may be
discovered a long time after the events that have given rise to a financial loss.
This may provide reinsurers with the problem of potentially, having to pay for
claims that may have actually occurred years before the reinsurance cover was
agreed, they have the advantage of knowing that once the reinsurance period
has expired, there can be no further claims made against them for that year.
There are no run-off problems for them to consider or contend with

31. Ultimate net loss (UNL) clause
Defines a loss as a sum which the ceding company sustains following a
loss, after necessary adjustments are made.
Comprises the sum actually paid (or, on occasion, payable or to be paid or
liable to be paid) by the reinsured in settlement of losses/claims.
Unless specifically excluded, expenses attributable to the claim are
included (for example, legal and loss adjustment expenses).
Will not include ex gratia payments, literally, payments as a favor rather
than from an obligation.
The agreed deductions are typically all recoveries, salvages, subrogations
and claims on other reinsurances.
Enables recovery by the reinsured from the reinsurer in advance of the
claim being finally ascertained.
Payments into court or the overseas equivalent are usually expressly
recoverable from liability reinsurers.
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32. Net Retained Lines Clause
The purpose of this clause is to amplify the Ultimate Net Loss and to
stress that reinsurance only applies to that proportion of any insurance
which the reinsured retains net for its own account.
Otherwise, the reinsured could recover the same loss from a few
reinsurer.
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33. Limits and Deductibles
• The limit(s) of liability and the excess(es) (or deductible(s)) on
the contract, and how they are to be applied
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Each loss occurrence - catastrophe
and/or casualty excess of loss:
• Defined in the hours clause as the sum of
all individual losses directly occasioned
by any one disaster, accident or loss or
series of disasters, accidents or losses
arising out of one event.
• The reinsured reserves the right to
decide when a particular ‘loss
occurrence’ commences.
• the reinsured can divide the catastrophe
greater in duration than the relevant
period, into two or more ‘loss
occurrences.
Each and every loss each and every
risk’ - property (per) risk excess of loss:
• The reinsured is typically the sole judge
of what constitutes ‘each and every risk’
subject to certain constraints.
• In no event shall a building and its
contents be considered more than one
risk
• Any one risk shall mean all insurance
written under one or more policies
covered hereon for all insureds each and
every four-wall area
• ‘Risk’ shall be considered in accordance
with the way the business is protected
• All values at any one location.

34. Claims Clauses
Notification of claims (or loss)
• States when notice is to be given by the reinsured to the reinsurer in the event of a
loss or losses.
Loss settlements clause
• Sets out reinsurers’ obligations in relation to the reinsured’s loss settlements
Claims handling clauses
• Reserve reinsurers’ rights of involvement in the management and/or determination
of the original claim.
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35. Interlocking clause
Applies when :
• The reinsured has losses under more than one policy and/or contract but from
the same occurrence or event; and
• Such policies and/or contracts attach to different treaty periods
Purpose: Distribute those losses between the involved (or interlocked)
years.
Result: The amount to be retained by the reinsured under a particular
treaty is reduced to that percentage of the retention which the reinsured’s
losses on the original policies and/or contracts incepting during the usual
twelve-month treaty period, bears to the reinsured’s total losses arising
out of all the policies and/or contracts contributing to the loss.
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36. Currency fluctuation clause
Used in treaties.
The retention and limit of liability are stated in the same currency,
The original business may result in claims in another or more than one
currency.
To calculate the amount of the loss to be paid in the contract currency:
1) Convert the retention and limit of liability into the currency of loss at the rate of
exchange existing at inception date;
2) Calculate the amount of the loss in excess of the currency of loss retention but below the
currency of loss limit of liability; and
3) Convert that amount into the contract currency at the rate of exchange existing at the
date of settlement by the reinsured.
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37. Liability clauses
•Adjusts the limit and deductible by reference to an index to take into account
inflation over a period.
Index clause
•Allows a reinsured to present separate and unrelated losses which it covered on an
aggregate basis under the terms of the original policy, as one loss.
•Changing the way in which losses attach to the reinsurance contract.
Aggregate
extension clause
(AEC)
•Extends the cover provided by a casualty treaty to a “claims series event”
•The standard clauses are known as TPX 1986 and TPX 1988
Claims series
clause
•Found on old US non-proportional casualty treaties.
•Requires the reinsured to notify claims within a certain period beyond which the
contract ceases to respond.
Sunset clause
•An extended version of claims notification and handling clauses.
Extended claims
reporting clause
•Set out the basis on which reinsurers are prepared to provide cover for
occupational disease and physical impairment arising under an employers’ liability
and/or workers’ compensation policy.
•Standard clauses are known as the ACOD (accident circle occupational disease)
clauses.
Occupational
disease clauses
•Describes an additional amount retained by the reinsured,
•Usually on the working layer of a casualty treaty
Loss corridor
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38. Treaty exclusions
General
Exclusions
Nuclear Exclusion Clauses
Pollution Exclusion Clauses
War And Terrorism
Exclusion Clauses
Reinsurance Assumed
Insolvency Fund Exclusion
Clause;
Information Technology
Hazards Clarification
Clause
Market Specific
Exclusion Clauses
Property Reinsurance
Casualty Reinsurance:
North American Liability
Exclusion Clauses (LGT)
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39. Property Reinsurance
Mould exclusion clause
• Self-explanatory
• Four key elements:
• The absolute exclusion;
• The perils from which the fungi may result;
• A definition of fungi; and
• A manifestation requirement of twelve months from the actual event
Transmission and distribution line exclusion clause
• Excludes liability for physical loss or damage to transmission and distribution
lines and business interruption losses
• Imposed by reinsurers after incurring significant losses from hurricane Andrew
• Standard in direct policies where it may be the subject of an expensive buy-back
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