Many captives don’t understand key reinsurance terms

Having the right reinsurance partner is one thing, but many captives lack understanding about crucial issues related to the reinsurance agreement, Brian First of Arch Insurance and Eric Lark from law firm Kerr, Russell and Weber, said at a discussion at the Cayman Captive Forum 2015 taking place this week.

They argued that a myriad of reinsurance issues and provisions are often overlooked or misunderstood by captive stakeholders and service providers.

“Many owners have never seen the binder, or reinsurance agreement, but these terms should be negotiated,” Lark said, adding that an industry standard agreement will be accepted some 50 percent of the time.

“Owners are still learning by the time it comes round to the first board meeting, but the agreement was made in good faith and we will live with the terms for at least the first year,” First said.

And while many new captive owners are still in the dark on key business and legal terms, such as limits per claim and cash coverage limits, the insurance industry isn’t going out of its way to make things any easier, they said.

“If you don’t know or understand your ALAE (allocated loss adjustment expense) then you need to ask more questions,” First said. “If you don’t ask then we are not going to get into a whole lot of detail.”

Considering the many potential reasons for a divorce between a captive and a reinsurance partner, which can be costly and perhaps fatal, the key advice was to address as many of these issues up front and in writing as possible. “It’s a case of hoping for the best but preparing for the worst,” First said.

Surveying the delegates, fluctuations in pricing in reinsurance was cited as the area with the potential to cause most confusion and contention. “You can have 12 people in the room looking at this but unless everyone has a pure maths degree they won’t all understand,” said one delegate.