FX for reinsurance settlements

How do reinsurers and cedants handle currency on reinsurance settlements?

Usually each balance is settled in the currency the contract and the account set out, and convert only where one side needs a different currency. The map below shows who pays whom, when, and where a conversion usually happens.

A general map, not a description of any particular contract. Terms, dates and currencies are set by each contract and each account.

Two things stand out. The largest conversions are often the least predictable ones: cash calls and catastrophe recoveries. And a conversion can happen twice in one settlement, once on paper in the account and once in cash, at different rates and by different parties.

Should we settle in original currency or convert to one currency?

The contract usually decides. Where it gives a choice, settling each currency in that currency avoids a conversion neither side may need, while converting to one currency simplifies the account but leaves someone paying the spread.

Settling in original currency means several payments for one account, one per currency, but each side receives money in the currency it will probably pay out in. A reinsurer with US dollar claims reserves has little reason to receive sterling only to buy dollars back. A cedant paying euro claims is better placed receiving euro recoveries.

Converting everything into one settlement currency means one payment per account and simpler reconciliation. The cost is that at least one party then holds the wrong currency and converts it, usually at its bank's standard rate unless someone checks. Where a broker converts on either side's behalf, ask which rate is used, how it compares with the market mid at the time and who bears the cost.

Whichever approach applies, the questions are practical: which currencies each side actually needs, who converts, at what rate and when. Agreeing them at renewal is easier than arguing about them when a large balance falls due.

How should we handle the currency on a cash call or a large recovery?

Plan for it before it arrives. A cash call is usually large, due within days and often in a currency the reinsurer does not hold in that size.

Proportional treaties commonly let the cedant call cash for a single large loss above an agreed figure rather than wait for the next account. Excess of loss recoveries follow the cedant's payment of claims and can be large after a catastrophe. Both arrive at short notice, in the currency of the loss or the contract, and both are the trades where a poor rate costs most.

• Know the payment period in the cash call clause and the date the clock starts.
• Hold, or be able to source quickly, the currency your largest likely calls will be in.
• Agree with your provider in advance the limits, approvals and cut-offs for a large payment, so the first cash call is not also the first test.
• Ask more than one provider for a price on a large conversion, and agree the value date before you ask.
• Confirm the beneficiary details with the broker or cedant by phone on a number you already hold.
• Record the rate and the time of each conversion so it can be checked against the mid later.

On the receiving side, a cedant receiving a large recovery in US dollars after paying the underlying claims in dollars can simply hold it. If it funded those claims by converting sterling, whether to convert the recovery back depends on what the dollars are needed for next.

For illustration, on a US$25 million recovery every 10 basis points of markup is US$25,000,000 x 10 / 10,000 = US$25,000. The size of these conversions is why a few basis points matter.

Which exchange rate applies when a reinsurance contract is in a different currency?

Whatever the contract wording says. Read the rate of exchange or currency conversion clause and check what it means for your account with your broker and your own legal advisers. We do not interpret contract wording.

A rate of exchange clause, sometimes called a currency conversion clause, sets out how amounts in other currencies are converted into the currency of the contract. In excess of loss reinsurance it often matters most when the retention and limit are applied to losses paid in several currencies. In proportional business it can govern how accounts in several currencies are brought into one settlement currency. Clauses differ in the rate they use. Some refer to the rate at which the cedant converted, some to a published rate on a stated date, such as the date of payment or the end of the account period, and some to a rate fixed in the contract. The choice can change how much is recoverable after a large loss, which is why the wording is worth reading before a loss rather than after.

Questions to check against the contract with your broker and advisers:

• Which currency are the premium, the retention and the limit expressed in?
• Which rate converts amounts in other currencies, from which source and on which date?
• Does the same rate apply to premium, claims, cash calls and recoveries?
• Does the clause govern only the calculation, or also the currency in which balances are paid?
• Who calculates the rate, and how is it evidenced in the account?
• What happens if the stated source stops publishing the rate?

One distinction is worth keeping clear. The rate the contract uses to work out what is owed and the rate at which either party actually converts the cash are different things. The first is set by the wording. The second is set by your bank or provider, and that is the one a quote lets you compare.

Which currency should bordereaux and reinsurance accounts be kept in?

Keep the original currency and amount on every line, and record the rate and date wherever a line is converted into the account currency.

Premium and claims bordereaux under proportional treaties and binders list each risk or claim, often in its original currency. Where the account settles in one currency, each line has to be converted at some rate, and the contract or the agreed accounting procedure should say which. If the cedant converts at one rate, the broker at another and the reinsurer books at a third, small exchange differences appear on every account and are easily mistaken for premium or claims errors.

• Show the original currency code and amount on every bordereau line, not only the converted figure.
• State the rate used for any conversion in the account, its source and its date.
• Reconcile exchange differences separately from premium and claims queries.
• Agree at renewal which currency each account is rendered and settled in, and keep it consistent across periods.

MGAs that report bordereaux to their capacity providers face the same issue from the other side. Our page on converting premiums received in other currencies covers holding premium in the currency it is remitted in.

Should we match currencies across reinsurance premiums, claims and recoveries?

Where you can, hold each currency against payments due in that currency and convert only the net difference. Every conversion you avoid is a spread you do not pay.

A reinsurer receiving US dollar premium and expecting US dollar claims can hold the dollars until the claims fall due. A cedant paying euro claims and receiving euro recoveries can keep the euros moving without passing through sterling. Converting in one direction and back again weeks later pays the markup twice and adds exposure to the rate in between.

Netting helps too. If a cedant owes a quarterly balance in dollars and is due a recovery in dollars from the same reinsurer, settling the net amount means one payment and no conversion at all, where the contract and the parties allow it.

How far to match the currencies of assets and liabilities is also a reserving, capital and accounting question for your actuary, your finance director and your regulator. We do not advise on it. What we can show is what each conversion you do make costs.

How should we price the conversion on a reinsurance settlement?

Get more than one quote for the large ones, agree the value date first and measure every conversion against the market mid at the time. Cash calls, large recoveries and adjustment premiums are where a few basis points matter most.

The markup is the difference between the rate you are given and the mid at that moment, in basis points:

markup (bps) = |your rate − mid| ÷ mid × 10,000

A spot conversion is agreed today for settlement, usually two business days later. Where the settlement date is known, the conversion can be priced ahead of the deadline, which gives time to compare providers. Where it is not, such as a cash call, having an account and approvals ready matters more than finding the last basis point on the day.

• Ask each provider to price the same amount, currency pair and value date in the same window.
• Ask for the time of execution on every confirmation, so you can check the mid yourself.
• Include payment fees and any intermediary deductions in the comparison, not just the rate.
• Review the markup on your settlements once a year. Our guide to FX rate creep explains why it tends to drift.

What does InsuranceFX do for reinsurance settlements?

We measure what your settlement conversions cost today and put your flows, including one-off large conversions, to several regulated providers without naming your firm. The provider converts and pays.

A cost review compares each settlement conversion with the mid at the time and shows your markup by currency and size. A blind quote shows what other providers would charge for the same flow, or for a specific cash call or recovery. Any account is opened by your firm directly with an FCA-authorised provider, which carries out its own checks. InsuranceFX never holds money or makes payments.

Reinsurance brokers that collect and pay on balances, and may hold them as client money in between, face their own questions. See FX for insurance and reinsurance brokers. Where a Lloyd's syndicate is a party, premiums and claims that settle through Lloyd's central accounting can be converted by Lloyd's at settlement. See FX for Lloyd's syndicates and managing agents.

Request a blind quote   Ask for a cost review