Our claims experience has shown that there is a lack of clarity on this area of the law for those providing reinsurance capacity into Peru with opposing counsel or reinsureds often maintaining that reinsurers have zero control because claims control and co-operation provisions violate the principle of non-subordination also known as the principle of autonomy. Additionally, in this context, we look at the recent regulation published by the Peruvian regulatory authority, the SBS, in Resolution 4706-2017 on reinsurance and coinsurance and try to identify what is next to come in Peru.
What are CCCs?
We start by examining what are CCC's?
CCC's are typically, but not exclusively, found in reinsurance contract wordings. As well as giving reinsurers the right to appoint third parties such as loss adjusters, they can also allow reinsurers to control all negotiations relating to the settlement of the underlying loss. Sometimes, these clauses are expressed as a condition precedent to liability, which means that the conditions in the clause have to be met before any payment obligation attaches to reinsurers. Claims control is a stricter version of its sister clause, claims co-operation – which quite often will only require the reinsured to keep the reinsurers appraised of developments in the underlying claim.
In short, these are provisions for the benefit of reinsurers customarily giving them advance notification of potential claims, access to information and might contain restrictions on the reinsured in respect of compromising claims.
Control clauses will be more common where the reinsured retains little, or none of the risk. It makes sense that where the reinsurer has the vast majority of the retention and is exposed to the financial consequences, that reinsurers would want to have a level of control. Co-operation by contrast will generally be found in reinsurance policies where the reinsured has retained a more substantial proportion of the risk but also where the reinsurer is comfortable with the local jurisdictional claims capability of the local carrier.
So, why is there controversy over the validity of CCCs in the Peruvian insurance market?
The non-subordination principle in Peru
The principle of non-subordination or autonomy of the Insurance Contract was regulated under Article 322 of the General Law in Peru, prior to the coming in force of the Peruvian Insurance Contract Act of 2012. The principle is as follows:
"the Reinsurance Contract does not subordinate the relations derived from the Insurance Contract. In consequence, the payment of a loss event derived from the Insurance Contract cannot remain conditioned by existing relations between the insurance company and the reinsurer."
Article 139 of the Peruvian Insurance Contract Act is consistent with Article 322 of the General Law, and thus there has been no modification of the principle by the new law in Peru.
The argument or myth often advanced is that control and co-operation clauses contained in reinsurance contracts are not admitted by Peruvian law or are nullified because the law in Peru states that the insurance contract should not be subordinate to the reinsurance contract. In our view, this is an incorrect interpretation of the autonomy principle. In order to succeed in showing that the insurance contract is subordinated to the reinsurance there has to be an express condition to this effect in the insurance contract. Absent this express provision, it remains that the insurance contract is not conditional to any other policy.
In Peru, the insurance contract and the reinsurance contract are two different legal relationships and the insured is not a party to the latter. The CCCs referred to above only have an impact on the legal relationship that arises from the reinsurance. This interpretation is further supported when one examines the standing of reinsurance contracts under the Peruvian Insurance Contract law and the relevant SBS resolutions. These rules say that in respect of Peruvian insurance companies obtaining reinsurance protection, insurance contracts may adopt the conditions, form and methods generally accepted in international practice – but they should contain as a minimum: a reasonable cost, an undetermined loss risk that must be assumed by the reinsurer and a period for the reimbursement of losses. In addition, what has been agreed between the parties in the reinsurance contract does not modify the obligations, in respect of the contracting party or policyholder, insured, beneficiary or compensated third party, of the direct insurer on the basis of the provisions in the General Law and the insurance contract.
It follows that if the insurance company has chosen to hear the views of its reinsurance provider before finally making its decision on the claim, that is entirely a matter for the insurance company and does not impinge on the principle of autonomy of the insurance contract.
SBS Resolution 4706-2017 on reinsurance and coinsurance in Peru
The above regulation came into force in June 2018 and is applicable to insurers entering into reinsurance and coinsurance.
In part it provides that when a local insurer acts as a front, ceding 100% of the insured risk to reinsurer(s), the parties - insured, reinsured and reinsurer - may agree that payment by the reinsured for a specific loss or claim shall be granted only after it has received funds from the reinsurer. For this provision to apply, a clause stating the parties’ agreement and duties in case of loss must be incorporated in the insurance and reinsurance contract.
The purpose is to ease the financial burden on Peruvian insurance companies that are 100% fronting by making the payment obligation trigger on the claims decision and indemnity being recovered from the reinsurer. Subject to the precise contract terms agreed, the SBS regulation appears to provide for deferring the decision on insurance cover until the reinsurer has provided its opinion and make payment of the loss conditional on payment made by the reinsurer. How does this SBS regulation fit with the principle of non-subordination for the purists who argue that CCCs are illegal in Peru? In short, it is a financial provision designed to ease the financial burden on the reinsured having to fund the claim in the first instance. But moreover, it reveals that the SBS recognises that reinsurance plays an important role and reinsurance market practice of this type does not violate the principle of non-subordination.
What next from the SBS?
We are aware that the SBS in Peru has opened up consultations with local carriers and experts in Peru on the importance of CCCs and we anticipate that after such consultations, the SBS would issue regulation endorsing the legal standing of CCCs.