Reinsurance Terminology Explained: Bordereau and Other Terms of Art

Terms of art are often used to set a particular industry or profession apart from others by using jargon that has a "special" meaning only understood by those working in that industry or profession. As Professor Kingman Brewster Jr. said, "Incomprehensible jargon is the hallmark of a profession."

Let's start with the basics. While many reinsurance contracts have the words "contract" or "agreement" in their titles, many others use words like "treaty" or "facultative certificate." Moreover, reinsurance contracts, regardless of how they are titled, are generally categorized by people in the reinsurance industry as either treaties or facultative certificates. So, what is a treaty or a facultative certificate?

What's in a Name?

A "treaty" is the name given to a reinsurance contract that covers a portfolio of business. For example, if under a reinsurance contract, a reinsurer is obligated to share in the premiums and losses of all the insurance company's medical malpractice policies written in the United States during the treaty period, that reinsurance agreement is called a treaty. Why a reinsurance contract covering a portfolio of business is called a treaty is a bit of a mystery lost in the annals of time, but we know for sure that it is not an international agreement between two sovereign states but a reinsurance agreement between an insurance company and a reinsurance company covering a large number of insurance policies that the insurance company intends to write during the period.

If, however, the reinsurance contract only covers a specific risk insured by an insurance policy, for example, the property of the Empire State Building in New York, the reinsurance agreement is known as a "facultative certificate" of reinsurance. A facultative certificate is better known as a "fac cert." According to the Guy Carpenter & Co. LLC Glossary, the word "facultative" connotes that both the primary insurer and the reinsurer usually have the faculty or option of accepting or rejecting the individual submission (as distinguished from the obligation to cede and accept, to which the parties agree in most treaty reinsurance).

Next time you hear someone talk about a reinsurance treaty, you will know it is a reinsurance contract covering a segment of the insurance company's policies. And, if they ask about a fac cert, you will know it is reinsurance of a specific policy covering a specific risk.

To Cede or Not To Cede

The word "cede" appears in various forms throughout the world of reinsurance. First, the direct insurance company that purchases the reinsurance from a reinsurance company is called the "cedent," the "ceding insurer," or the "ceding company" (as well as the reinsured). Next, the policies and risks underwritten by the direct insurance company are "ceded" by the insurance ceding company to the reinsurer and a "ceded" risk is called a "cession."

For example, if an insurance company writes homeowners insurance and enters into a reinsurance contract on a proportional basis where the reinsurer shares in 80 percent of the premiums and losses, the ceding company cedes 80 percent of the premiums and losses on all its homeowners insurance policies, and each policy that it writes is a cession to the reinsurance contract.

And, just to make it more confusing, a reinsurer that cedes a portion of its business to another reinsurer is called a "retrocedent" and the assuming reinsurer is called the "retrocessionaire." Where does this all come from?

The word "cede" comes from the Latin verb cēdere, which means go, go away, withdraw, or yield. While in English, "cede" generally means to give up, surrender, or transfer rights, in reinsurance, it means transferring the risk from the insurance company to the reinsurance company. The party that transfers the risk and cedes the underlying insurance liability is the cedent (or retrocedent if a reinsurer is assuming reinsurance risk).

In the United Kingdom, and sometimes in the United States and elsewhere, cedent is often spelled "cedant." Many years ago, I did some grammatical research and concluded that the word is correctly spelled "cedent." But whether you use cedent or cedant, it means the buyer of a reinsurance contract.

Bordereau Defined

As one delves into the more technical aspects of a reinsurance contract, the term "bordereau" often comes up. The uninitiated may immediately recoil from a word like bordereau, but those who have been around the block know that a bordereau is just a list or report. But is it just a list?

The venerable Robert W. Strain defined bordereau as follows.

Furnished periodically by the reinsured, a detailed report of reinsurance premiums or reinsurance losses. A premium bordereau contains a detailed list of policies (or bonds) reinsured under a reinsurance treaty during the reporting period, reflecting such information as the name and address of the primary insured, the amount and location of the risk, the effective and termination dates of the primary insurance, the amount reinsured and the reinsurance premium applicable thereto. A loss bordereau contains a detailed list of claims and claims expenses outstanding and paid by the reinsured during the reporting period, reflecting the amount of reinsurance indemnity applicable thereto. Bordereau reporting is primarily applicable to pro rata reinsurance arrangements and to a large extent has been supplanted by summary reporting.¹

The IRMI.com Glossary definition of bordereau is "a report providing premium or loss data with respect to identified specific risks. This report is periodically furnished to a reinsurer by the ceding insurers or reinsurers." A single report or list is a bordereau. When describing more than one bordereau, add an "x" after the "u" to make the term plural: "bordereaux."

Why Bordereau?

The word "bordereau" derives from the middle French word "bordrel" and from the old French word "bort," which means edge or margin. Merriam-Webster Dictionary shows the first known use around 1858, but A Treatise on the Law of Principal and Agent, Chiefly with Reference to Mercantile Transactions (Paley, William. 3rd ed. New York: Banks, Gould, 1847) mentions bordereau in the context of a statement or memorandum listing the details of negotiable instruments. Earlier uses can also be found if you search the Internet or hang out in dusty corners of business libraries. As with most terms of art, "bordereau" was used instead of report or list by reinsurance professionals and became common usage in the industry in the 1800s.

Interestingly, the errors and omissions clause found in many reinsurance contracts was developed when all information received by the reinsurer was presented on comprehensive bordereaux. The clause ensured that coverage was provided even though an item was inadvertently left off the bordereaux.² See our Expert Commentary, "When Errors Occur in a Reinsurance Relationship" (December 2002).

Types of Bordereaux

The term bordereau is used to describe most lists or reports of premium or losses required under the reinsurance contract from the reinsured to the reinsurer. In the facultative context, where an individual risk is reinsured, a bordereau is not necessary. The premium report is the reinsurance premium paid for the facultative certificate for that individual risk. On the loss side, typically, there is individual loss reporting. But, if a facultative certificate generates multiple losses emanating from an individual risk, monthly or quarterly reports listing all claims and all payments on claims attributable to that single risk may be deemed a bordereau.

In the treaty context, a premium bordereau is merely a detailed report of the premiums ceded to the reinsurers from each of the underlying policies subject to the proportional reinsurance treaty. Typically, the premium bordereau will set out policy-level detail, including the gross premium, the brokerage if any, and the ceded premium, along with basic details for each policy ceded to the treaty. The premium bordereau is also the initial method by which the reinsurer finds out the exact details of the business being written by the reinsured and assumed by the reinsurer.

Most reinsurance contracts will specify the reporting requirements for the periodic premium bordereau. I am sure by now all reinsurers have standardized the bordereau format and accept them electronically either in a proprietary format based on the reinsurance accounting system being used or in a common format like Excel. Certain statistical organizations and industry compilers of information in certain markets have standardized electronic bordereau reporting. For those using blockchain technology for reinsurance, the detailed information found on the bordereau will now be one of the blocks on the chain.

The premium bordereau generally goes directly to the reinsurer's accounting function so that the ceded premium can be booked. Nevertheless, it is important for the reinsurer to examine the premium bordereau for anomalies in either the premium volume or the risk information being supplied. The premium bordereau also serves as an important tool for the reinsurer when selecting certain risks for audit if the reinsurer engages in periodic audits of the business being ceded to the treaty.

A proportional treaty typically will have reporting requirements for losses, and these often manifest as a loss or claims bordereau. The reinsurance contract will set out the information requirements for the loss bordereau. Generally, the loss bordereau will contain risk details such as the insured's name, claimant's name, policy number, claim number, effective date, date of loss, loss reserve, expense reserve, and any paid losses or expenses. The loss bordereau, like the premium bordereau, is provided in electronic format and often in a standardized design. On a quota share treaty, the loss bordereau is often the only way the reinsurer will obtain information about the losses being ceded to the treaty unless there are special reporting requirements for certain risks or certain losses. Like the premium bordereau, the loss bordereau will be the tool against which the reinsurer will make selections when doing a claims audit.

Reinsurance Contract Requirements

Not every reinsurance contract requires premium bordereau reporting. Very often, reporting clauses require summary accounting information rather than the individual risk detail typically found in bordereau reporting. For example, a reporting clause may provide simply as follows.

The Company shall render a monthly account within __ days after the end of the period. This account shall summarize premiums, return premiums, allowances for commissions, losses paid, loss adjustment expenses paid, and salvage recovered. The account shall also reflect the balance due by either party.

These monthly or quarterly reports are merely account statements summarizing the business under the treaty and do not provide policy-level detail. Where the reinsurance contract does not prescribe detailed bordereau reporting, the reinsurer must audit periodically to test the business being ceded and to ensure compliance with the terms of the reinsurance contract.

Where bordereau reporting is required, the reinsurance contract will express the detailed information required. For example, here's the following.

The Company shall furnish the Reinsurer with the following:

1. Bordereau within 30 days after the last day of each month, payable within 60 days after the last day of each month. The bordereau is to include the following items:

1. Name of Insured
2. Policy Number
3. Effective/Expiration Dates
4. Type of Transaction (New, Renewal, Endorsement, or Cancellation)
5. Policy Limit
6. Premium
7. Ceding Commission
8. Net Premium

Conclusion

Terms of art and industry jargon are off-putting to many. The reinsurance industry is littered with these terms. Yet, words like "treaty," "fac cert," "cede," and "bordereau," once their meaning is known, are no longer mysterious and are easily understood and put to common use.

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¹ Robert W. Strain, editor, Reinsurance Contract Wording, Athens, TX: Strain Pub, 1992.

² Robert F. Salm, "Reinsurance Contract Wording," Reinsurance, Athens, TX: Strain Pub, 1980.