Dear Friend,

Here’s a reinsurance joke for you:

Underwriter A says to underwriter B, who he has reinsured; “I’m not paying your claims because I think you’re a useless underwriter and all those claims would never have happened if I’d been in charge”

Underwriter B says to Underwriter A “Hang on a minute, if I’m a useless underwriter — surely that makes you just as useless as me for reinsuring me in the first place”

Underwriter A: “Oh, actually I hadn’t thought of it like that — I think I’d better pay up after all!”

I’m sorry it’s not very funny — but it does go some way to parodying a very important reinsurance test case that has reached a significant judgement.

A great victory for common sense was achieved yesterday when a judgement was handed down from the UK court of appeal in the infamous “AON-77” cover case.

I’m not going to repeat the tedious and complicated details of the case itself — I’ll leave that to your lawyers and compliance departments, who will doubtless be circulating many reports on the subject over the nest few weeks.

But the nub of the dispute was to what extent a reinsured had a duty to protect the interests of his reinsurers. And the final answer is “no, not really — there is nothing wrong with taking advantage of an advantageous contract”.

Quite right too! The only person who is qualified to look out for a reinsurer’s interests is the reinsurer himself.

If we can all start retrospectively avoiding claims because we don’t believe the primary underwriter has been doing a great job, the whole basis of the reinsurance business would collapse. Claims happen — they are not evidence of underwriting failure.

What if the reinsurers in this case found had their retrocessionaires unwilling to pay, citing the same reasons for avoidance as they had tried with their own client? What possible argument could they use to effect a recovery?

An earlier judgement had tried to draw a distinction between when a contract is proportional and non-proportional, saying that for XL deals, reinsurers should expect a lower duty of care from a reinsured than when they’re in a quota-share partnership — but this appeal ruling has blown that distinction out of the water too.

As I keep saying, reinsurance only works as a partnership. So, choose your partners with extreme care!

After all, it’s in your interests — and no-one is holding a gun to your head, forcing you to underwrite business that you are not happy with. If you don’t like suffering from contracts that are too advantageous to your clients, don’t sign up to them.

And if you want more underwriting control of the underlying business — start demanding it!