Risk protection – clear and certain

Just a couple decades ago, at a meeting of the Society of Actuaries (SOA), industry executives described traditional reinsurance treaties as so-called "gentleman's agreements". There was an old maxim that said, "If you don't trust the handshake, don't trust the contract."

In the intervening years, however, the contracts that re/insurers write setting forth the obligations that form the modern foundations of our industry have undergone big changes. The interconnected nature of risk has intensified; threats are more complex, requiring protection products to evolve in tandem. Contracts had to keep up.

Amid this shift, the less formal pacts described at that SOA meeting have given way to legal documents whose wordings have helped create more clarity and certainty. There are multiple drivers, including questions about re/insurers' obligations after the 9/11 terrorist attack that had to be resolved. Regulatory requirements for plain wording, with an eye toward benefiting individual insurance consumers, have also helped. 

Steadily, clearer, more certain wordings have also found their way into more complex business-to-business contracts. On the client side, our partners are strengthening their contract teams that historically were seen as a back-office function but recently have been recognised as a key element of fit-for-future insurance operations.

These welcome changes aside, the effort to make insurance contracts clearer and more certain remains a work in progress that requires collaboration. While disagreements over substantive issues will never vanish, well-worded contracts can remedy challenges before they escalate. 

The current reinsurance environment, with renewed focus on capacity and accurately priced  risks, makes for an ideal opportunity for clients, primary insurers, brokers and reinsurers to intensify conversations around improving contracts for all parties. Emerging technologies also now hold greater promise to play a role in strengthening contracts.

Certain aspects of re/insurance contracts can be standardized, to simplify and streamline understandings for clients, insurers, and reinsurers.  For instance, some contracts that are the product of years of development may by default contain legacy language, an amalgamation of clauses and wordings that serve to complicate understanding or make re/insurance processes less efficient. 

Recently, there has been some traction to address lower-hanging fruit with regards to eliminating clause relics and exchanging them with clearer language where appropriate. 

The benefits are manifold: Claims processing can be accelerated, pragmatic solutions can be identified early, and true partnerships between reinsurers and insurers can be forged. This is particularly relevant as legal environments across the world appear to be diverging. Contracts that are clear and certain irrespective of borders are one antidote to this fragmentation.

There is more to do. For the benefit of all parties, there's an urgent need for contract language to develop and evolve, including efforts to address antiquated clauses such as those governing confidentiality, to catch up with how our industry uses information in the 21st century. 

And just because a contract may include bespoke elements to address a client's unique challenges, there's no reason to sacrifice clarity. Bespoke doesn't mean opaque.  By building more clarity and certainty into even highly tailored risk protection agreements, the contracts we write more accurately reflect underwriters' intentions. What emerges is greater trust.

At their core, contracts are the physical manifestation of our industry's purpose. They memorialise the deal in the mind of all parties involved. Crafted elegantly, a contract describes the breadth of protection in terms everyone understands. Alignment on a contract's meaning helps achieve predictable outcomes, reduces potential conflicts and enhances relationships. 

Similarly, contracts that contribute to understanding of coverages across the re/insurance value chain contribute to sustainable risk sharing. They are a key enabler for re/insurers to deploy capacity.  Contract clarity and certainty goes beyond words, too. Achieving this requires a healthy discussion between risk-sharing partners, one that's backed by sufficient data granularity to allow an accurate description of the risk at the point of sale.

Contract certainty is also critical to our efforts to navigate a changing risk landscape. Emerging risks, from per- and polyfluoroalkyl substances to ESG standards that our clients must keep pace with, must be reflected in contracts that lay out clear terms for how the re/insurance industry is approaching them. 

For all these reasons, Swiss Re is at the forefront of bringing industry professionals together at our annual Contracts Expert Circle events at our Centre for Global Dialogue campus near Zurich. We exchange ideas, including about using technology such as portfolio analytics or artificial intelligence (AI) to make contracts clearer, more understandable and more predictable. 

Our minds are open. We want to talk with brokers and clients, to establish early dialogue about contract improvements that can become industry standards. While the trust symbolised by a handshake remains a pillar of our industry, people still want things memorialised in writing - the clearer and more certain the better.