Sunset clause

A sunset clause sets a date beyond which a claim can no longer be presented to the reinsurer, even if it occurred during the cover period and even if it would be covered on the merits. The period runs from treaty expiry and typically ranges from three to ten years. The problem it solves is the open-ended tail: a losses occurring treaty on a long tail line leaves the reinsurer exposed to notifications arriving fifteen or twenty years later, which forces it to tie up reserves and capital with no closing horizon and prevents any underwriting year from being closed. By bounding the reporting window, the clause lets an account be finalized. The cost falls entirely on the cedant, which alone keeps claims reported out of time, including those whose lateness is not its doing. For that reason it is closely watched by regulators and auditors, who check that the cedant actually reserves for this implicit retention rather than treating it as a nil risk. The London Market Excess, or LMX, spiral crisis that hit Lloyd's Names in the late 1980s and early 1990s shows what the absence of a sufficiently strict clause can cost: extremely slow-developing US asbestos and pollution claims kept resurfacing in chains of retrocession between syndicates long after many believed the accounts closed, causing cumulative losses exceeding eight billion pounds sterling for Names, whose liability was at the time unlimited. The episode generalized shorter and stricter sunset clauses on retrocession treaties.

The LMX spiral at Lloyd's, fed by extremely slow-developing US asbestos claims resurfacing endlessly through retrocession chains for want of sufficiently strict sunset clauses, causes cumulative losses exceeding eight billion pounds sterling for Names between the late 1980s and early 1990s.

Sunset clause, Clause de forclusion, Clause de déclaration tardive, Clause de délai de déclaration