Reinsurance and its role in the London Market
Reinsurance and its role in the London Market
This domain tests the forms of reinsurance, how reinsurance interacts with the subscription market, and the clauses that determine how a reinsurer responds to the cedant's settlements.
Forms of reinsurance
- Facultative: individual risk, offered and accepted separately.
- Treaty: portfolio-based and obligatory. Proportional forms are quota share and surplus; non-proportional forms are excess of loss (per risk or per event) and stop loss (aggregate loss ratio).
- Retrocession is reinsurance of a reinsurer.
Clauses that matter
- Follow the settlements / follow the fortunes: the reinsurer is bound by the cedant's good-faith settlements within the terms.
- Claims control and claims cooperation clauses displace that: the reinsurer must be involved or consent.
- Cut-through clauses allow the original insured direct access in defined circumstances; absent one, reinsurance is a separate contract and gives the original insured no direct rights.
- Insolvency clauses preserve recovery if the cedant fails.
Worked example. A Lloyd's syndicate writes a £100m property risk and buys a 40% quota share. It receives a £50m premium and cedes £20m; a £30m loss cedes £12m. Because the treaty is proportional and silent on claims control, the reinsurer follows the syndicate's good-faith settlement. If a claims control clause applied, the syndicate's failure to notify the reinsurer before settling could reduce recovery.
Traps. Asserting the original insured can claim directly on reinsurance - usually false without cut-through. Confusing follow-the-settlements with claims control. Treating a quota share as excess of loss. Forgetting that reinsurance security is itself assessed by the cedant.
Key points
- Facultative is individual; treaty is portfolio-wide and obligatory.
- Proportional: quota share and surplus. Non-proportional: excess of loss and stop loss.
- Follow-the-settlements binds reinsurers to good-faith cedant settlements.
- Claims control and cooperation clauses override that default.
- Reinsurance is a separate contract; the original insured has no direct rights without cut-through.