Reinsurance Policy Coverage

When an individual or a company takes an insurance policy, the risk that they are indemnifying themselves against is very clear. For instance, if a person takes insurance on their car, then both parties know exactly what the insurable interest is i.e. the car. However, this is not the case with reinsurance policies. This is because a reinsurer is indemnifying the insurer against a liability that is dynamically changing.

The insurance company may have a thousand policies when they decide to buy reinsurance. However, later the number of policies may increase to two thousand since insurance companies are continuously issuing policies. Now, the question arises about the specific coverage that the reinsurance company provides to the insurance company.

If the details about the coverage are not agreed upon and explicitly specified in the reinsurance contract, there is always a chance that the parties may end up litigating in court when a claim arises.

There are three common ways in which the scope of a reinsurance policy is defined. The details of the same have been mentioned below in this article.

1. Risk Attached During: If an insurer has a reinsurance policy and they issue a new policy of its own, they are said to be attaching this new risk to the reinsurer. Reinsurance companies define the scope of their coverage using a “risk attached during” basis. This type of coverage is also known as “policies attached during” coverage.

   This type of coverage means that the reinsurance company will only be held liable for any type of loss which may occur from policies that were attached i.e. issued or renewed during the reinsurance period.

   It needs to be noted that the date on which the policy was issued by the insured company is the important factor here and not the date of loss or the date of claim. Hence, if a reinsurance policy is undertaken for the period between 1st Jan 2022 and 31st Dec 2022, then all the losses arising from policies attached during this period will be covered by reinsurance.

   For example, if a policy is issued in Dec 2022, it is possible that the loss may occur on Jun 2023. However, that is not relevant here. We need to take into account the date of policy issuance in order to determine whether it is covered or not.

2. Loss Occurred During: Not all reinsurance contracts are made on a “risk attached during” basis. In many cases, the reinsurers want to limit their exposure to the losses which may arise during a given period. Hence, they issue a reinsurance policy on a loss occurring during basis. In such cases, the data or loss occurring is the important date.

   The date of policy issuance and the date of the claim being made are NOT important in determining whether the insurance policy will be considered to be in scope. Also, it is important to understand that the loss referred to here is the loss occurring to the insurance company and not to the actual insured.

   Let’s understand this with the help of an example. Let’s say that the reinsurance policy is in force for 1st Jan 2022 to 31st Dec 2022, then if the insurance company suffers any loss during this period, then it will be covered under the reinsurance policy. It does not matter if the policy was issued on 5th June 2021 or if the claim was made on a date that is outside the policy period.

3. Claims Made Basis: The “claims made basis” of reinsurance policy issuance is quite similar to the “loss occurred during basis”. In such cases, one additional step is involved. After the loss has been discovered, the insurer has to make a valid claim within the policy period. If a valid claim has not been made on time, then it will not be covered under reinsurance.

   In this case, the date on which the valid claim is made is important. Other dates such as the date on which the policy has been issued and the date on which the actual loss occurred are considered to be irrelevant while deciding whether the policy will be considered to be in scope.

   Once again, an example will help make the point clearer. Let’s say that the reinsurance policy has been issued on a “claims made basis” between the dates of 1st Jan 2022 and 31st Dec 2022, then the valid claim must have been filed before 31st Dec 2022 in order for the claim to be considered valid by the reinsurer.

   In such policies, the definition of a valid claim is a likely source of dispute in the future and hence must be clearly defined between both parties to ensure that there is no dispute about the same in the future.

The fact of the matter is that the coverage of reinsurance policies is a very complex subject. It is important for the reinsurer as well as the insured to make sure that their legal, as well as operational teams, are on the same page. This is because reinsurance claims are generally related to catastrophes and include large sums of money. The denial of such a claim can be detrimental to the financial health of an insurer.