Inside View - The challenge of agreeing to contracts at placement.

(From Reinsurance)

A quiet revolution is underway in North America as cedents and assumers of reinsurance risk reverse a business process that has existed for decades. The traditional approach to reinsurance contracts was 'deal now, details later', but the obvious debacle of the World Trade Centre litigation reminded the industry that 'details' are often the subject of million-dollar disputes. The parties involved in the reinsurance transaction - insurers, brokers and reinsurers - have recognised that the status quo is no longer an option. They have now committed themselves to a process whereby the details develop simultaneously with the deal.

Outside the US, this process was further spurred by regulators, notably the Financial Services Authority (FSA) in the UK and the Australian Prudential Regulation Authority (APRA).In the US and Canada, the industry is focusing on fully agreed contracts ready for signature at placement. To reach this point, it was necessary to revamp completely the slip/contract process that existed for decades.

In practice, the process begins with the cedent approving a placement package and full contract wording. The second step involves securing full wording agreement from reinsurers as part of the placement authorisations, including incumbents and potential new markets. Since the terms and conditions tend to be fixed over many years for most placements, the process plays out in an 80/20 fashion. Most time and effort is spent on a few difficult contract terms or in negotiations with a small number of reinsurers.

While contract at placement initiatives began in earnest during 2005, the January 2006 renewal season was clearly the largest and most important test thus far. This was a tough test for a new process because of the great turmoil in the market following the record losses and overall business impacts of the storms of 2005. However, our own data, supplemented by market sources, indicate that a clear majority of contracts at January 2006 renewals were agreed at placement. With these successes, momentum is building in the industry, encouraging more insurers to participate.

At Guy Carpenter, we are reviewing our experience to identify where the process can be improved. So far, we have discovered that some reinsurers found it difficult to respond in the ...