XIII All-Russia Conference on Reinsurance_2009

Profile Re Reinsurance Company took part as a   partner in XIII All-Russia Conference on Reinsurance, organized by the All-Russian Insurers Union. A presentation on ‘Reinsurance underwriting liability for state and municipal contracts, or ‘Soap bubble of compromise’ was made by   Alexei Kovalenko, head of the underwriting department of OJSC Profile Re during the round table held on March 25, 2009 in the Amphitheater Hall.  Issues related to the reinsurance of liability for   state obligations non-fulfilment on state and municipal contracts like problems comcerning legislation, capacity and approach to underwriting were discussed during the Section.   Points of  ‘Reinsurance of underwriting liability for state and municipal contracts, or ‘Soap bubble of compromise’ report:

In our opinion in the near future this segment of the insurance market will become one of the most attractive for insurers as well as reinsurers thus we should pay sufficient attention to it. In this report  I would like to focus on several issues of this kind encountered among otheres in our everyday
work, namely underwriting liability or as it is called warranty period liability...

... Indeed  the warranty period goes after the execution of the works specified in the contract. However the moment when it starts, sometimes is interpreted somewhat ambiguously +

In practice we usually see 2 options:

1. Warranty period is formulated as a separate phase (with specified period) following the end of the works.

2. Warranty period is included in the term of the contract as an integrated whole.

For a reinsurer it is always important to understand where one phase ends and the other begins. Let’s consider the 2 standard types of contracts:

1.  Contract provides for the construction of an object

2. Supply contract (e.g. for equipment) providing phased deliveries or performance of the work  


What difficulties may waylay the insurer as well as reinsurer within the warranty period.
The most dangerous of them  are losses due to defects in materials which require huge remedial investments and losses  resulting from poor performance (initial work) at very large and expensive facilities. Consequently    these losses may occur within the warranty period and have unpredictable consequences.

Defects in the work performed (even with trouble-free and timely signing of acceptance-transfer report for object commissioning) may come out during warranty period. It is possible that the insurer will not be able to fix them for some objective reasons (e.g. bankruptcy or if  the contractor simply vanishes in the thin air) - in such a case the customer will bear expenditures for the recruitment of other contractors to fix defects and deficiencies revealed within the warranty period.

As it was mentioned before the main objective of voluntary-compulsory type of insurance such as non-fulfillment of obligations stipulated by state or municipal
contract is the desire of public authorities after funds are advanced to get the money back either in the form of the work performed (services rendered) or in
 case of failure to achieve result in the form of advanced funds and indemnity for  contingencies due to the maintenance contract.

Surely the result of the specified contract must meet several conditions such as quality, quantity and term of its execution. In other words the Insurer in this type of insurance
bears the financial risk of the Assured to the customer. And the volume of such financial risk is limited to the amount of the advance paid. The concept of advance  among other things implies that it is only a part of the budgeted expenditures to achieve the final goal. The insurance sum stated in the above-mentioned contracts in the amount of the advance differs significantly from the amount of budgeted expenditures or the so-called contract value. Payment is made in the amount of the loss occured within the limits of the amount of insurance i.e. here we see first loss insurance.

The ultimate point of funds development under the contract is signing of the acceptance-transfer report for the results of work performed.    In other words the signing of the report shows that the obligations for the  insured advance materialization are  fulfilled and the risk of advance default or default on obligations is no longer there, that is to say
budgetary funds have been fully used for the stated purpose. The financial risk has worked itself out.

As mentioned above obligations under state contract beside the timing and
volumes must be met with appropriate quality and this point is incorporated into all state contracts. Moreovere it is put in black and white there that in case of
failure to perform the work with proper quality the Assured is obliged to take remedial measures at his own expense i.e. the Assured bears the responsibility for the quality of the
works performed. In our opinion if a client wants to obtain insurance coverage the product/service liability policy or professional liability policy is the choice.  
There is another point  that I’ve already mentioned - amount of insurance under the contract is only a part of its overall volume.  Why should the Insurer / Reinsurer bear
responsibility for the liability risk (sorry for the tautology)  for the first loss insurance? It  seems to be a Russian invention as it is.

As we see it financial risk and liability risk
are somewhat several different areas that require appropriate approach. And if you, dear colleagues, are going to work in this businesslet’s probably introduce a separate tariff classification without mixing it's apples and oranges and detailing not only tariffs but some risks for a specified phase set by the contract ...

We primarily provide coverage for the budget funds i.e. take sides with state authorities. The Assured must be interested in high-quality
performance of his obligations  and does not lay the blame on somebody else;s door. The quality of the work results depends on the skill of the contractor and the quality of
materials used  rather than on punitive punitive sanctions provided by the contract +

We namely undertake indemnity for losses  connected with claims for the quality of the work performed only upon 2 conditions


1. With regard to contracts in the construction sector: If the object is insured from building and installation risks with coverage for post-completion underwriting liability. And
respectively this is the policy that will cover all the risks of Contractor for the quality of his work.

2. In other economic spheres: If the responsibility for underwriting liability  is covered only in case of the impossibility of obligations fulfilment and /or the non-solvency of the Assured is confirmed by a adjudication order that entered into legal force and/or an act of bailiff service of the impossibility of revindication.