Unclear reinsurance contracts could cost insurers millions of pounds, actuary warns

A leading actuary has warned that the failure of reinsurance contracts to fully address periodical payments could cost insurers millions of pounds.

Lane Clark & Peacock partner Joe Monk said many reinsurance contracts were unclear on a reinsurer's liability in the event that a primary insurer settles a claim using a periodical payment.

In contemporary reinsurance contracts, the relevant clauses are often "to be agreed or to be confirmed". Older contracts do not even mention periodical payments.

This, said Monk, could be problematic for insurers because reinsurers would be looking to come to an arrangement to settle their liabilities - known as commutation.

Without the contractual mechanism to address this, each commutation would need to be negotiated.

Monk said: "On what basis do they commute? Terms have been discussed with reinsurers, but it is not obvious and not set in stone. The calculations are complicated. I don't believe insurers and reinsurers have it adequately covered."

He said that with reinsurers often holding "the balance of power" in the relationship, there was a risk commutation agreements would be less favourable to insurers.

Monk warned current negotiations could set a precedent for future commutations. Where single losses could amount to millions of pounds, the financial implications for insurers are potentially large.

"The recent round of reinsurance renewals has not shown a dramatic change in the situation," he said, adding that he did not expect the relevant clauses to be examined in detail for another three or four years.

Norwich Union director of technical claims Dominic Clayden said the insurer did not have clauses in its reinsurance contracts on periodical payments, discussing issues "as and when".

He added that its reinsurance had a "high attachment point", meaning the reinsurance only operated at a high level of loss.

Royal & SunAlliance (R&SA) technical liability manager Phil Bell said his company negotiated commutations on a case-by-case basis and he did not feel "disadvantaged" by this arrangement.

But he added that R&SA would be looking to formalise the commutation arrangements once it had more experience of dealing with periodical payments.