The access to records clause, also commonly referred to as the “check” or “audit” clause, is one of the most important contractual rights a reinsurer has under a reinsurance agreement. The purpose of this clause is to give the reinsurer the right to inspect the books and records of the cedant applicable to the reinsured business. This is one of the few methods by which reinsurers must assess the business they are contracting under a reinsurance contract and determine whether the reinsurer is complying with the terms of the contract, in particular the accuracy of the policy, assignments and premium calculations. A typical record access offer provides the following. The Reinsurer or its appointed representatives shall have free access to the books and records of the Company on matters relating to this reinsurance at any reasonable time for the purpose of obtaining information relating to this Contract or its subject matter. More recent provisions on access to records are more limited and specific as to the scope, timing and method of verification provided to the reinsurer. Clauses on access to records can be found in most reinsurance contracts. The right of inspection is so ingrained in the customs and practices of the reinsurance industry that it is supported to suggest that the reinsurer has this right even in the absence of an express reservation.
Insurance is a contractual relationship that arises when one party (the insurer), for a fee (premium), agrees to compensate the other party (the insured) for losses caused to a certain subject (risk) caused by certain unforeseen circumstances (hazards or dangers). The term ‘guarantee’, commonly used in England, is considered synonymous with ‘insurance’.
The 10/10 Rule is a matter of analyzing and demonstrating the transfer of risk as a precondition for the use of reinsurance accounting, which was codified in the early 1990s with the adoption of Financial Accounting Standard (FAS) 113 (and its statutory counterpart, SSAP 62). FAS 113 itself was a response to alleged abuses and set the standard for testing whether something should be called an insurance contract. FAS 113 required that the transfer of risk be demonstrated by comparing the present value of the cash flows associated with the contract and, in particular, by exceeding certain thresholds of “significance” of risk. The thresholds, often referred to as the 9a and 9b tests, are: 9a. The reinsurer assumes significant insurance risk under the reinsured parts of the underlying insurance contracts. 9b. It is possible that the reinsurer could suffer a significant loss from the transaction. While neither “significant” nor “reasonably possible” was defined in this context, standard rules of thumb quickly emerged in the implementation of FAS 113. The most commonly cited is the “10/10 Rule”. This rule states that a contract reaches a threshold if there is at least a 10 percent chance that it will suffer a loss of 10 percent or more in present value (expressed as a percentage of the contract premium ceded).