As you can tell from many of my blog posts, and certainly from my IRMI.com Commentaries on Reinsurance, negotiating a clear and unambiguous contract wording is a big part of dispute avoidance. Certainly, a significant number of reinsurance disputes result from less than stellar contract drafting. This is true also in commercial insurance. The failure to define an important term, the lack of a critical endorsement or the inclusion of terms and conditions that have no real relationship to the reinsurance deal being negotiated can all result in disputes. So how can these problems be mitigated?
Well, while reading updates on LinkedIn today I came across a link to a blog post that provides a useful response to this question. Here’s the title of the blog post found on the Hiscox company blog: “The changing role of a reinsurance contracts specialist.” Posted by Louise Jarvis, apparently a contract wordings specialist at Hiscox, the blog outlines how the role of the contract wording specialist has moved from the back room to the negotiating table. Bravo I say.
Having the contract wording specialist available and assisting during the negotiation of a reinsurance contract is one giant step forward in avoiding errors and omissions in drafting the reinsurance contract. The team approach to underwriting a complex reinsurance risk should include not just the underwriter and the marketing person, but also the contract wording specialist, perhaps in-house counsel and certainly someone from claims. More esoteric and problematic risks will also need input from actuarial specialists. This horizontally-integrated cross-disciplinary approach to underwriting complex risks is a model that many reinsurers are undertaking (and many commercial insurers as well) to avoid mistakes that could occur without the right expertise in the room.
Certainly, one of the biggest problems in the past has been the negotiation hand-off after the essential terms of a reinsurance deal are reached. The underwriter, with other and perhaps bigger fish to fry, was off to the next deal once the basic terms were agreed on the current deal. The underwriting assistants and ultimately the contract wording specialists were left with the underwriter’s cryptic notes and the slip and very little else. All the detail was left for others to back-fill. This is not the most error-free way of contract completion.
By leaving the contract wording specialist in the back room, the underwriter loses the opportunity to clarify and specify essential terms and conditions for the reinsurance contract beyond just the amount of the risk assumed and the premium required. For example, what kind of notice or reporting does the reinsurance underwriter want on this contract? Does the reinsurance underwriter care of the head of the cedent’s underwriting division leaves of the book of business is highly specialized? These are two examples of the kinds of issues that a contract wording specialist might raise during negotiations. By addressing important contract wording issues up front, the chances of misunderstandings and disputes diminishes.
Contract wording specialists certainly add value to the reinsurance proposition. It is up to the reinsurance underwriters to recognize that value proposition up front instead of relegating these experts to the back room. And if you think this is not a good idea, just ask a reinsurance underwriter how much fun it is to be deposed about the meaning of certain terms and conditions of the reinsurance contract to which the underwriter is wholly unfamiliar.