Currency clause in reinsurance

A Singapore insurer buys an excess of loss treaty denominated in US dollars for a portfolio whose claims are settled in Singapore dollars, ringgit and rupees. When a loss occurs, what amount is deemed lost: that of the loss date, the settlement date, the account date? The currency clause answers. It first fixes the treaty's currency, that of the retention, the limit and the premium, generally the dollar, euro or pound. It then specifies how to convert claims and premiums denominated in another currency: at the rate of the settlement date, the rate of the loss notice date, or an average rate for the period. The choice is not neutral. A retention of ten million dollars is reached faster if the cedant's local currency depreciates between the loss and the settlement, which can help or hurt depending on direction. For long-tail claims paid years later, the difference is large. Exchange stabilization clauses, which guarantee a rate or a capped gap, exist but are rare. The reinsurer generally covers its exchange risk with assets in the treaty currency. A disagreement over the clause is a source of dispute, and it is read together with the full wording.