New modern legal framework for conduct of reinsurance

Active role in codification of reinsurance law

If P&C has been actively involved in a global project to create a new private codification of reinsurance law. This set of rules of conduct for reinsurance effectively modernizes the old reinsurance law and enables uniform and transparent rules across the globe.

Reinsurance is an important financial service

Reinsurance is a globally important financial services sector that enables insurance companies to provide efficient solutions to the largest and most complex risks.

Reinsurance is sometimes utilized as a risk transfer mechanism in insurance solutions for corporate clients, especially with companies who have captive insurers but also when risk sharing within a panel of insurers includes reinsurance elements.

For nearly three years, work has been ongoing to create a single set of rules and principles for the conduct of the reinsurance business – the principles­
of reinsurance contract law project (PRICL). The idea of PRICL is to create a modern codification of reinsurance law, which would both provide a uniform frame of reference on a global basis and modernise the old (and often very harsh) rules regulating the conduct of the reinsurance business.

The principles of reinsurance law project is led by universities in Zurich, Frankfurt and Vienna, with the responsibility for the eventual published principles resting on the drafting committee. To ensure sufficient feedback from the market, participants’ advisory panels from reinsurance company representatives and direct insurance company representatives were also established.

Sharing experience

The project has participants from all major legal traditions around the world, with representation from the large European countries, but also from the US, China, Japan, South Africa, and Latin America, facilitating the creation of a truly global, uniformly applicable model principles. Reflecting the high quality of work and ambition within the PRICL project, UNIDROIT, the International Institute for the Unification of Private Law, adopted PRICL within its work programme for 2017–2019.

Many of the major reinsurance companies, such as Munich Re, Swiss Re, Hannover Re, and Lloyd’s, are involved in the project. If P&C, together with companies like Zurich, Axa XL, AIG, and Generali, is representing
the view of the direct insurers in the project.

“During the long history of If (and its predecessor companies), we have seen the benefits of efficient and secure reinsurance solutions, which help to provide competitive insurance solutions to many clients with diverse risks and needs. At the same time, we have seen the problems that can arise when the scope and function of reinsurance cover are compromised or misunderstood. Even through just the increased clarity of duties that it will bring, PRICL holds enormous promise“, Lari Kuitunen, reinsurance manager at If says.

Important to be part of the PRICL project

“We feel it is important to be part of the PRICL project, as we are contributing to building a clearer and more secure risk transfer framework for the global insurance and reinsurance industry. If has put a lot of effort into giving our input and sharing our expertise to ensure that the new private codification of reinsurance law will have the best possible chance to succeed in the market”, Lari continues.

The co-ordinator of the project, Professor Helmut Heiss of the University of Zurich, appreciates the contribution of practitioners in general and of If in particular: “Drafting rules of reinsurance contract law requires in-depth information on current practices in the market.

The PRICL project provides a unique framework for a joint venture of academics and leading players in the market in developing a systematic body of rules. The engagement of If and its reinsurance manager, Lari Kuitunen, was of the utmost importance to the successful outcome of the project. He acted as the voice of direct insurers in the project.”

Lari Kuitunen
Lari Kuitunen, Reinsurance Manager, If

Three years of work

The PRICL framework is scheduled to be published soon, and it will become publicly available and ready to be adopted by the industry. PRICL represents a modern codification of the current reinsurance practice, with improvements in key areas where disputes have often arisen (such as aggregation of losses).

Notably, for failure of duty as a reinsured party, PRICL adopts proportional remedies with quite a similar ruleset to that found in the UK insurance act of 2015. This means easy access to a fairer and less severe punishment for failure to completely fulfil the disclosure duty of the reinsured, or for other unintentional contractual breaches. This can be achieved without having to choose UK law to govern the contract, which may bring undesirable complications and cost.

Current reinsurance practice in this respect is lot harsher: for material non-disclosure or misrepresentation, the reinsurance contract can be deemed completely void. Under PRICL, the penalty more closely fits the crime, and complete loss of coverage would be expected only in exceptional cases.

Further “the new law includes not only the rules, but also commentary on interpretation and usage, providing far better clarity of duties and obligations of the parties to a reinsurance contract, allowing for ease of use and an almost textbook-like manual for conducting reinsurance, without having to collect years of reinsurance market expertise”, Lari says.

PRICL can be easily adopted in a reinsurance contract through the choice of a legal clause or incorporation, and partial adoption is also possible with fully flexible contract design, selecting only individual articles of PRICL.

These features should be especially interesting to entities who do not practise reinsurance on a large scale on a day-to-day basis, and they will be an especially useful contractual framework for captive insurers and major corporations that choose to structure part of their insurance protection in such a way that it contains reinsurance elements.

Article by

Ida Tuononen