Currency Clause (Reinsurance)
The currency clause (reinsurance) specifies the currency in which premiums and losses are settled and how amounts in other currencies are converted where a treaty covers several currencies.
- Clause type
- Condition
- Origin/Market
- Reinsurance market
- Favours
- Neutral
- Negotiability
- Market standard
Purpose
International reinsurance programmes often cover risks in several countries and therefore several currencies. The currency clause fixes a treaty currency and sets out the exchange rate and conversion date for amounts originally incurred in another currency – for example the rate on the date of loss, the date of payment, or a rate fixed in the contract.
Effect and limits
Without a clear rule, one of the parties bears an unintended exchange rate risk between the date of loss and settlement. The clause also determines how limits and retentions fixed in the treaty currency are applied to losses in a foreign currency – important where exchange rates fluctuate significantly during the treaty period.
Negotiation and practice
The choice of the applicable exchange rate (spot rate, average rate, fixed rate) and the conversion dates are key negotiation points, particularly where the treaty currency differs from the cedent’s functional currency.