ABSTRACT
Chapter 7 discusses the relation between the concepts of aggregation and back-to-back cover. It clarifies that there is no presumption of back-to-back cover in non-proportional reinsurance. Thus, in excess of loss reinsurance, an aggregation mechanism in the underlying contract may operate differently from the one in the contract of reinsurance.
If the aggregation mechanisms in the two contracts are not co-extensive, an aggregation gap arises which may complicate the assessment of the parts of a potential loss covered by the reinsured and the reinsurer respectively. Different aggregation mechanisms in the underlying contract and the reinsurance agreement may have adverse effects on both parties.
The reinsurance market has tried to avoid or overcome such adverse effects using two different approaches. Chapter 7 discusses the possibility of providing for a back-to-back formulation of the respective aggregation clauses in order to avoid that an aggregation gap arises as well as the use of so-called aggregate extension clauses that aim at overcoming the adverse effects of aggregation gaps.
