How To Make Friends with Your Reinsurer

September 2006

Reinsurance has been described by some commentators and courts as a partnership between the ceding insurer and the reinsurer. By partnership, the commentators mean in the business sense, not the legal sense, of the word.

by Larry P. Schiffer
LeBoeuf, Lamb, Greene & MacRae LLP

The reason for this characterization is that in a traditional reinsurance relationship, particularly a proportional or quota share reinsurance treaty written on a continuous basis, both the ceding company and its reinsurer usually are in it for the long term. Working together over the years, the ceding company and the reinsurer hope to return a profit to their respective shareholders. Some years the reinsurer will pay more losses then anticipated and other years the reinsurer will pay less in losses then expected. Overall, both sides win because the ceding company gets to write business and expand with the reinsurer's support and the reinsurer gets to reap the benefits of allocating capital to an insurance program that has good economic results.

When purchasing reinsurance, ceding insurers look for a high quality reinsurer, one that will provide long-term security and one that will pay its share of the claims without delay. If the ceding company wants to keep that high quality reinsurer on its reinsurance program, it needs to make sure that its reinsurer is happy. What can a ceding insurer do to avoid problems with its reinsurers and ensure that prompt payment will occur? This commentary will discuss some ways that ceding companies maintain successful relationships with their reinsurers.

Communication Is Key

It cannot be said enough that communication is the key to any relationship. This is true of personal relationships, and it is also true of business relationships. From the beginning of the reinsurance relationship through the course of dealing between the parties under the contract, clear and constant communication between the ceding company and the reinsurer is crucial. Many reinsurance disputes result because of a lack of communication between the parties. If the reinsurer is not kept informed of changes in the business being written or is not advised of claims in a timely manner, the reinsurer may not renew the contract. If the lack of communication is really bad, the reinsurer may cease paying claims, and a dispute will arise. Keeping the lines of communication open between senior executives as well as line personnel will help avoid disputes.

When the reinsurance relationship is maintained through a reinsurance intermediary, the ceding company must be vigilant. While the ceding company may be communicating crucial information about the book of business to the broker on a regular basis, the broker may not be passing that information along to the reinsurers with the same sense of urgency. While most professional reinsurance brokers do their jobs and quickly pass on to reinsurers all communications from the ceding company, it remains the job of the ceding company to ensure that the information is being passed along in a timely and accurate manner. Disputes arise when the broker is not passing on information from the ceding company to the reinsurer. It is important for the ceding company to let the reinsurance broker know that it should pass on to the reinsurers all relevant information and communications from the ceding company without diminishing or significantly altering the flow of information.

In the direct reinsurance market, it is up to the ceding company's ceded reinsurance department to keep the communication lines open with the reinsurer. Systems should be put in place to make sure that communications to reinsurers occur regularly and appropriately.

A ceding company should want to keep its reinsurer informed on a regular basis of all activities relevant to the business reinsured. From the initial placing information to the periodic reports, clear and accurate information flow keeps the reinsurer happy and avoids confrontation. There is no upside to a ceding company withholding information from a reinsurer, even if the news is not good. Being forthright about the experience on the book of business is something that reinsurers expect. While it may be that bad news about the business might result in nonrenewal of the reinsurance agreement, failure to disclose the bad news might result in a claim for rescission if the reinsurer continues on the treaty because the bad news was withheld.

Be Open and Honest with Your Reinsurer

The duty of utmost good faith in the reinsurance relationship is an information-forcing default rule that requires open and honest communication between a ceding company and a reinsurer. An accurate description of the risks covered by the reinsurance is necessary to avoid claims of misrepresentation and requests for rescission. Where ceding insurers get into trouble with their reinsurers is by failing to disclose to the reinsurers the true nature of the risks being reinsured. For example, if a ceding company is writing all terrain vehicles, but only discloses to the reinsurer that it is writing automobile exposures, the reinsurer may have a good claim for rescission based on the ceding company's failure to disclose the all terrain vehicles.

Openness goes beyond the initial representations made at the outset of the reinsurance relationship. If the nature of the risks changes during the operation of the reinsurance agreement, the ceding company should advise the reinsurer as soon as reasonably possible. So, for example, if, when the reinsurance agreement was entered into, incidental professional liability exposure was around 5 percent, but after 2 years the ceding company began writing policies that raised incidental professional liability exposure to over 20 percent, the ceding company should advise the reinsurer right away.

With claims, prompt and informative notice to the reinsurer is critical. While reinsurers have had limited success in avoiding claims based on the defense of late notice, there is no reason to test a reinsurer's mettle by failing to provide prompt notice of a claim. Reinsurers will have little hesitation to pay ceding companies claims if reinsurers receive prompt notice of claims at the earliest possible time and receive sufficient claims detail to validate the claim for payment. Providing early notice of a potential claim, even if the reserve is not yet at the reporting level, is a better practice than waiting until a claim breaches the reporting level and running the risk of the reinsurer claiming late notice.

Responsiveness Avoids Disputes

One complaint reinsurers regularly make is that their ceding companies fail to respond to inquiries in a timely manner. A reinsurer may want to know a wide variety of information prior to the anniversary date of a continuous contract or before the renewal of a contract with a fixed term. That information may include an update on premiums, including the distribution of premium by state, and an update on loss experience.

It is obviously important for a ceding company to provide its reinsurer with the information necessary to make a renewal or continuation decision in advance of the time period for cancellation or termination of the reinsurance agreement. If the ceding company is reporting monthly or quarterly on a timely basis, most of this information is available already. But where the ceding company and broker prepare an annual update for a complex reinsurance program, that information must be supplied in a timely manner.

Reinsurers ask claims questions to make sure reported claims are valid under both the insurance policy and the reinsurance agreement. Reinsurance companies have an obligation to their shareholders to only pay valid claims and to make sure that the claims they pay are, in fact, payable under the reinsurance contract.

Prompt responses to reinsurers' inquiries avoid disputes. If the inquiry requires research or cannot be answered immediately, the ceding company should advise the reinsurer of that fact and indicate when a response should be expected. Of course, inquiries from reinsurers must be legitimate and not made for the purpose of delay. Good faith is a two-way street, and the reinsurer must act in good faith toward the ceding company when making claims inquiries.

Conclusion

A good relationship between a ceding company and its reinsurer is a key to a long-term partnership that benefits both companies. The insurer/reinsurer relationship also benefits the insured by providing satisfactory insurance capacity. Regular, prompt, and honest communication between the ceding company and reinsurer ensures that the reinsurance relationship will last. More importantly, a good reinsurance relationship avoids disputes and no one wants an unnecessary dispute.

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