Indexed annuities and the stability clause

Document description

In some reinsurance contracts of the Casualty Excess of Loss type (XL) one may find simultaneously two clauses defined separately: 1) the Stability Clause (SC): in this clause the procedures are formulated by which the burden of monetary inflation is shared more equally between the insurer and the reinsurer, i.e. between the two parties of the XL-contract\; and 2) the Indexed Annuity Clause (IAC): this clause gives the rules according to which claims of the Indexed Annuity type (e.g. as a consequence of a traffic accident) are settled in the XL-contract. Of both clauses there is a score of variants available with each of them having its own merits and justifications of existence. It is not the purpose of this paper to describe all these variants and to select finally the best one according to some reasonably objective criterion. The paper merely describes formally the most frequently seen variant of the Stability Clause. Furthermore it tries to prove that as soon as this SC has been accepted, there is no reason to define a separate IAC since all the mechanisms of the latter are already handled implicitly in the SC.