What a re the Advantages Of Treaty Method over Facultative?



What a re the Advantages Of Treaty Method over Facultative?

1. The Treaty-method provides obligatory and automatic nature of reinsurance acceptances. The reinsurer cannot decline to accept any cession coming within its scope.

2. The risk commences simultaneously with that of the ceding insurer. Under the facultative method, the reinsurance cover operates only from the time the reinsurer accepts the risk.

3. The treaty method involves much less clerical work and costs as compared to the costs involves in the facultative reinsurance.

4. The rights and obligations of each party are clearly defined in the treaty agreement, whereas in facultative, it has not been so easy.

5. The treaty-method ensures a constant and regular flow of business.

Under this method, a number of insurers agrees to pool together all their business to a leading office and the payment is made by this leading office. The profit of this association is distributed amongst the insurers according to their shares to the business.

Reinsurance Treaty Contracts :

A reinsurance treaty is a contract for reinsurances. A set of terms and conditions for a given class of business is provided and the reinsurance capacity is created for the reinsured to underwrite any risk which will be written in future.

As opposed to facultative reinsurance it is meant to create capacity and it gives a reinsurance facility to cede risks after retentions. All future writing of risks has got an automatic, simultaneous and continuous reinsurance cover.

A reinsurance treaty is an agreement for twelve months between the reinsured on one part and the reinsurer on the other whereby the reinsured agrees to cede and the reinsurer agrees to accept the reinsurance business, pursuant to the provisions.

Treaty reinsurance is a contract for future reinsurance. It is offered before its inception and main terms of the treaty are specified on a SLIP. The prospective reinsurer goes through the slip and decides his acceptance.

After its acceptance, the reinsurer signs one copy of the slip and returns it to the reinsured. Such signed slip is called a Binder, when a broker is given an order for placement of a treaty.

When he completes his order he issues a Cover Note to the reinsured giving list of participating reinsurers along with slip terms of the treaty. The reinsured then issues full contract wording called Treaty Document or Treaty Wording to each reinsurer.

There should not be any discrepancy between the slip terms and the terms in the contract. Any such discrepancy is to be cleared off before executing the Treaty Document.

In the event of any discrepancy between the slip and the treaty document discovered subsequent to signing, in strict legal sense, document super cedes the slip.

Reinsurance treaties are placed before the inception of the treaty year on the basis of a slip which summarises 'main' terms and conditions of the treaty arrangement.

Generally, it contains name of the company, type of treaty, class of business, perils covered, territorial scope, retention, limits of reinsurance cession, commission percentage, profit commission formula and percentage, portfolio provision or reserve provision.

If any with interest (less tax) on reserves, cash loss limits, frequency of accounts rendering and underwriting information with mention of specific exclusions essential for the reinsurer's acceptance.

Once the treaty is placed on the basis of the slip, the broker prepares a cover note with names and shares of reinsurers. Such cover note serves the basis of reinsurance agreement and later on treaty wording is prepared. The treaty wording is to be corrected if there is any error in the main terms as compared to the slip.

If the slip is wrong and wording is correct, the ceding company must give satisfactory explanation and obtain agreement of the leader to be followed by other reinsurers.

Treaty wordings have a number of variations in form and structure but standardised London market clauses are common in use. American market treatises contain American market standard clauses.

Again, from class to class there will be variation of clauses in treaty wordings. Therefore, the best way, according to me, is to generalise common pattern of treaty wording and then add special clauses peculiar to the type of treaty or particular class of business.

The Reinsurance Officers Association has made valuable contribution to standardise Treaty Wording in late seventies and eighties. With computerisation and standardization, Treaty Clauses are drafted and are available in a CD.

After WTC attack losses, leading global reinsurers like Munich Re/ Swiss Re have drafted Terrorism Exclusion Clauses, Political Risks Exclusion Clauses and introduced Treaty Slip formats with attached main clauses to avoid any misgiving. Such Treaty Slips are standardised by them and run into 100 pages instead of earlier slips of 3 or 4 pages.

Some Legal Conventions:

Follow the Fortune Clause means Reinsurers follow Legal and Technical Fortune of the Reinsured in respect of claims settlements.

Reinsurers do not follow Excreta payment of claims.

Claims Co-Operation Clauses provide that Reinsured must seek Reinsurer's advices before entering into litigation in respect of a disputed claim.

Claims payable by Reinsurers can be more than TSI to the extent of legal expenses, court awards, punitive damages, etc.