March 5th, 2012

Eurozone – Reinsurance Contract Issues

Posted at 1:01 AM ET

Morley Speed, Managing Director and Mike Rosen, Senior Vice President

The implications of the many possible outcomes of the current “Eurozone Crisis” are profound and unpredictable and in some cases, unprecedented. The implications are also wide-ranging, embracing political, economic and legal dimensions. Such complexity gives rise to different, not to say contradictory, interpretations and predictions. However, we can only be certain that actual events, when they happen, will follow their own unique trajectory.

In such a situation there are limits to the outcomes that can be predicted through analysis, however useful they may be. The aim of this briefing, therefore, is to identify practical issues in contract wording that are likely to arise if any of the crisis scenarios were to occur. Our goal is to maximize the options available to our clients, as well as to ensure a rapid response to what will likely be a fast-moving series of events.

Each insurer has its own unique set of circumstances and therefore we have not attempted to draft one-size-fits-all clauses. Rather, we have identified the issues as a prompt for further discussion and, possibly, the evolution of tailor-made clauses. Moreover, we would strongly emphasize the need for insurers to obtain their own legal opinions on these practical issues.

The “Eurozone Crisis” is constantly evolving, so we cannot hope to arrive at definitive conclusions. However, we hope that this briefing will assist in planning and response to the crisis. Guy Carpenter would appreciate feedback on this briefing and we welcome the opportunity to engage in further discussions.

Crisis Scenarios

The possible “Eurozone Crisis” scenarios are many and varied. Guy Carpenter has identified three basic categories:

  1. A specific country leaves the Eurozone.
  2. The Euro is divided into a number of tiers with different exchange rates.
  3. The Euro itself is dissolved.

In our analysis, while not dismissing the possibility of scenarios 2 and 3, we have concentrated on scenario 1 as the one that is most likely to occur. The focus is solely on an examination of the position of an insurer that has exposures in the Eurozone and has a reinsurance contract expressed in Euros.


While we cannot predict the specific nature of future events, our goal is to provide insurers with a range of contractual provisions and options that may maximize their freedom of action and protect their reinsurance assets.

Practical Issues

Governing Law and Lex Monetae

Generally, the provision of external governing law in a contract shields that contract from a unilateral change of currencies by a statute of the converting country.

However, the Lex Monetae rule states that if a contract clearly refers to the currency of the converting country, then a change in that currency is universally recognized at the conversion rate decided by that country.

This situation is more complicated when a country leaves the Eurozone, yet the Euro remains in place for the remaining countries. There is therefore a distinction to be made between the Euro as the lawful currency of the Eurozone and the Euro as the currency from time to time of a particular Eurozone member.

For Europe-wide treaties it is less likely that the Euro would be interpreted as the currency of a particular Eurozone member. However, the issue is more pressing for a single-territory treaty.

Possible Actions to Be Taken

  • Specify a governing law outside any potentially exiting countries, or even outside the Eurozone altogether.
  • Specify a jurisdiction, as above, but possibly only in respect to disputes arising from defined “Eurozone Crisis” events (see next section below).
  • Define the Euro as being the lawful currency of the Eurozone.

Eurozone Crisis Events

If the insurer chooses to trigger contractual options following “Eurozone Crisis” events it is necessary to define them clearly in advance and to ensure that they are likely to perform in the desired way.

Possible Action to Be Taken

  • Introduce contractual wording in the nature of the following:

For the purposes of this clause “an event associated with the termination or constriction of economic and monetary union in the European Union” includes, without limitation, each (and any combination) of the following events:

i) The withdrawal from legal tender of the Euro;
ii) The replacement of the Euro by any alternative single, unified currency by two or more Member States;
iii) The withdrawal from the Euro (which for the avoidance of doubt includes withdrawal from the European Union) by any Member State;
iv) The introduction of a new currency as a lawful currency in a Member State;
v) The fixing of conversion rates between the Euro and a new currency introduced pursuant to ii) or (iv) above;
vi) The disappearance or replacement of a relevant price source for the Euro.

Place of Payment

Although the European Union (EU) Treaty requires the free movement of funds, there is an exemption in the Treaty that allows for capital controls if justified by public policy or public security.

Possible Actions to Be Taken

• Specify that the place of payment is outside a perceived vulnerable country.
• Specify that payment is in Euros to a Euro account specified by the reinsured.

Currency Fluctuation

Many reinsurance contracts have a currency fluctuation clause. However, as it stands, the clause does not really address the issues that arise when a single country leaves the Euro.

Specifically, if a new currency is introduced it is unlikely to have been in existence when the underlying risks were actually accepted. A fairly simple amendment to the clause can secure an appropriate linkage to the new currency.

However, it is unlikely that insurers (or more particularly their original insureds) would wish their contracts to be redenominated in the new currency. It is more likely that they would wish to remain in the Euro, or even to have the option to revert to US Dollars or UK Pounds.

Furthermore, the currency fluctuation clause is really designed to protect a cedent against the weakening of the contract currency relative to the currency of exposure. The logic of a country leaving the Euro would suggest that the new currency would weaken against the Euro.

Possible Actions to Be Taken

• Specify that the contract is in Euros and in Euros only or alternatively restrict other currencies to which it might convert to US Dollars or UK Pounds.
• Specify that in the event of the Euro adapting multi-conversion rates the contract will revert to the “harder” Euro.


If the limits of the reinsurance are adjusted by reference to an economic index within a country that leaves the Euro, it is likely that the indexation will operate in a volatile way. Furthermore, if the limits remain in Euros, the index will clearly be inappropriate.

Possible Action To Be Taken

• Make provision for the index to be amended to one appropriate to the Euro (as the designated currency of the Eurozone) following a defined crisis event.

Currency Dependent Terms and Conditions

As mentioned earlier, it is difficult to predict how events may develop, so there is a need to be alert to unintended consequences, such as, for example, the application of average or the adjustment of treaty premiums.

Possible Action To Be Taken

• Make provision to waive the impact of terms and conditions that operate solely as a result of the crisis event.

Validity & Performance

It may be considered worthwhile to specify that the contract remains valid, notwithstanding a crisis event.

Possible Action To Be Taken

• Introduce a clause such as:

“The redenomination of any Member State(s) of the European Union into a currency other than the Euro shall not effect or alter any term of or discharge or excuse performance under this Contract, or give either party the right unilaterally to alter or terminate this Contract.”


“The occurrence of an event associated with the termination or constriction of economic and monetary union in the European Union shall not have the effect of altering any term of, or discharging, or excusing performance under this Contract, or give either party a right unilaterally to alter or terminate this Contract.”

Premium Warranties

Notwithstanding the proposal to affirm the validity of the contract (see Validity & Performance section above) it is advisable to make provision for the failure to comply with premium warranties. Initially, there might appear to be a logical conflict between affirming the validity of a contract while providing for the breach of warranty within such a contract.

However, the validity of the contract is affirmed in relation to changes to the denominated currency. The premium warranty provision is related to payment frustration. While the two contingencies may well be linked, they are conceptually distinct.

Possible Action To Be Taken

• Amend premium warranty provisions to provide for breaches solely arising from actions of sovereign government. For example:

Where the reinsured is unable to make payment in full under the premium payment clause in this reinsurance as a direct result of the implementation of capital controls and/or a moratorium on movement of capital out of the country by:

(i) A Member State of the EU following the withdrawal of that Member State from the EU and/or the redenomination of that Member State into a currency other than the Euro; or
(ii) The Council of Europe, following the withdrawal of a Member State from the EU and/or the redenomination of a Member State into a currency other than the Euro,

then the right of Underwriters to cancel this policy for non-payment of premium shall be suspended until [14] days from the date on which such capital controls and/or moratorium cease to be effective.


We set out to provide some useful thoughts on how to mitigate the consequences of a “Eurozone Crisis” event. The briefing has focused on issues that directly affect our clients as well as providers of cover to their clients.

There are other key issues in this area revolving around fiduciary and treasury issues and Guy Carpenter is uniquely positioned to help clients with contingency planning in these areas. We encourage you to contact your Guy Carpenter representative to review and discuss your needs in more detail.

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