When the Cedent's Claims Handling Slows Down
Your reinsurer participates in a 30% quota share on a professional liability treaty. Over two quarters, the cedent's average time to close claims has risen from 90 to 160 days, and its case reserves have grown 25% while reported claim counts are flat. The cedent attributes the change to a new claims system and a hiring gap. Two claims now exceed the treaty's $250K notification threshold and were reported to you 60 days after the cedent's own reserve was set. The treaty requires prompt notice of claims exceeding the threshold. Your share of the reserve increase is $1.4M. The cedent has asked for a mid-term commission adjustment to offset its rising expenses.
1. How do you distinguish a systems problem from a reserving or notification problem, and what do you do about the late notices?
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Separate the symptoms. Flat claim counts with rising reserves and slower closure is consistent with either a backlog (systems/hiring) or with reserve strengthening (a reserving problem)-the two have opposite implications for you. Ask for the closed-claim development triangle and the average reserve per open claim by quarter. If average reserve per claim is rising, it is reserving; if only the count of open claims is rising with stable averages, it is a backlog.
On the late notices: the 60-day delay past the cedent's own reserve date is a breach of the prompt-notice clause regardless of cause. Reserve your rights in writing now-state that you are not waiving the notice requirement-while continuing to pay undisputed ceded losses. Do not use the breach as a reason to deny coverage unless prejudice is demonstrable; the point is to preserve the position and force a corrected notification process.
2. The cedent wants a mid-term commission adjustment to offset rising expenses. How do you respond?
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Decline the mid-term adjustment as framed. A ceding commission compensates the cedent for acquiring and administering the business; it is not a cost-plus reimbursement for a systems migration. Allowing a mid-term increase because the cedent's expenses rose would set a precedent that every internal cost overrun becomes your cost, and it would reward the very backlog that is inflating your reserves.
Respond by tying any commission discussion to performance: if the cedent restores closure times and clean, timely notification, the renewal negotiation can reflect that. Offer technical support-a claims audit or a shared review of the reserve methodology-rather than money. Keep the refusal in writing with the reasoning, and confirm that the existing commission terms stand for the remainder of the term.