Common Reinsurance Treaty Clauses, Part I

A collection of vocabulary terms and definitions covering common reinsurance treaty clauses, exclusions, regulatory requirements, and the Interests and Liabilities Agreement.

Preamble

The introduction to a reinsurance treaty that identifies the parties to the treaty, usually designating the primary insurer as the “Company” or the “Reinsured.”

Affiliated Companies Clause

A clause stating that the primary insurer specified in the preamble includes its affiliated companies to broaden the reinsurer’s liability.

Reinsurance Clause

A clause (also known as the business reinsured or business covered clause) that establishes the obligatory nature of cessions and describes the type of reinsurance provided.

Risks Attaching Basis

A basis of attachment where the reinsurer is responsible only for losses under policies issued or renewed on or after the treaty’s effective date.

Losses Occurring Basis

A basis of attachment where the reinsurer is responsible for all losses occurring on or after the treaty's inception date, regardless of when the underlying policy was issued.

Policies Issued Basis

A limited attachment basis where the treaty covers only newly issued policies, often used when underwriting guidelines have significantly changed to exclude existing poor loss experience.

In-force Policies Basis

An attachment basis used by primary insurers to run off existing policies when no new policies are being sold.

Definitions Clause

A clause that defines the terms used throughout the treaty to make locating them easy, though some reinsurers prefer defining terms as they first appear.

Access to Records Clause

A clause giving the reinsurer the contractual right to inspect all of the primary insurer’s records relating to the treaty coverage for audits and to protect against withheld information.

Federal Excise Tax Clause

A clause stating the primary insurer is responsible for administering and remitting the federal excise tax (usually at a rate of $1$ percent) levied against alien reinsurers.

Alien Reinsurer

A reinsurer that is incorporated under the laws of any country other than the United States.

Currency Clause

A clause specifying the base currency for the treaty and the basis for any conversion from original currencies at prevailing exchange rates.

Governing Law Clause

A clause specifying which law governs the reinsurance treaty to prevent the law of an alien reinsurer’s domicile from prevailing by default.

Nuclear Incident Exclusion Clause

A clause that excludes nuclear loss exposures (except for specific incidental ones) to avoid accumulating exposures already covered by nuclear reinsurance pools.

Pollution Exclusion Clause

A clause excluding loss or damage resulting from pollution, seepage, or contamination, typically tailored to the specific property or liability exposure.

War Risk Exclusion Clause

A clause excluding loss from war or warlike activities, though it typically does not apply to losses in the U.S. if the underlying policy has a standard war exclusion, or to riots and civil commotion.

Terrorism Exclusion Endorsement

An endorsement excluding loss or damage resulting from acts of terrorism, often combined with the war risk exclusion.

Insolvency Fund Exclusion Clause

A clause stating that reinsurers will not indemnify primary insurers for assessments paid to state guaranty funds due to another insurer's insolvency.

Arbitration Clause

A provision stating that an arbitration panel of disinterested third parties (usually active or retired executives) must be used to resolve disputes before legal action is taken.

Offset Clause

A clause allowing the primary insurer and reinsurer to net balances due to each other, which can be applied within a single treaty (narrow) or across multiple treaties (broad).

Errors and Omissions (E&O) Clause

A clause stating that inadvertent clerical errors or omissions do not relieve either party of their obligations or void the treaty, provided they are corrected when discovered.

Service of Suit Clause

A clause allowing the primary insurer to seek legal remedy in a U.S. court of convenient jurisdiction when dealing with an unauthorized or alien reinsurer.

Insolvency Clause

A state-required clause where the reinsurer agrees to pay its obligations to the liquidator “without diminution” (full value) if the primary insurer becomes insolvent.

Intermediary Clause

A clause required when an intermediary is involved, making the reinsurer take the credit risk for funds transferred from the primary insurer through the intermediary.

Unauthorized Reinsurance Clause

A clause specifying requirements (like letters of credit or collateral) for an unauthorized reinsurer so the primary insurer can receive favorable accounting treatment.

Interests and Liabilities Agreement (ILA)

A separate agreement attached to treaties with multiple reinsurers that specifies the percentage of participation and establishes several liability for each party.

Several Liability

A provision in the ILA ensuring that the failure of one reinsurer to meet its obligation does not increase the liabilities of the other participating reinsurers.