What is a Provisional Notice of Cancellation (PNOC)?
A provisional notice of cancellation is a means by which a participant in a reinsurance treaty may notify the other participants of its intention to withdraw from the treaty.
This type of notice is only used for continuing reinsurance contracts, that is, those that remain in force until either party withdraws from the contract. Once a PNOC has been issued, the parties generally have 90 days to renegotiate their contract. If they don’t reach an agreement, the contract will be cancelled.
Key points to remember
- A Provisional Notice of Cancellation (PNOC) is a legal notice given by one insurance company to another.
- It is used by the parties to a reinsurance contract for the purpose of renegotiating or terminating their agreement.
- Often, reinsurance contracts allow each party to issue one PNOC per year and agree to allow 90 days to reach an agreement. The absence of an agreement would then lead to the termination of the reinsurance contract.
How PNOCs work
Successful insurers issue thousands of policies across a variety of classes, exposing themselves to a complex matrix of risk. To mitigate this exposure, insurers buy their own insurance in the form of reinsurance treaties. Reinsurance treaties are generally long-term agreements under which the reinsure company undertakes to cover a well-defined category of policies. During this contract, the reinsurer will review the activity of the insured to assess his future risk. Depending on the outcome of this assessment, they may or may not decide to continue the reinsurance contract for a longer term.
Through the reinsurance market, insurance companies can cover their risks by transferring part of their liabilities to other insurance companies. In exchange, the insurance companies that assume the responsibilities will receive part of the insurance premiums generated by the underlying insurance contracts. While some reinsurance contracts only remain in effect for a fixed term, others are continuous in the sense that they remain active indefinitely until either party terminates the contract. One way for either party to begin the process of terminating the contract is by issuing a PNOC.
Often, continuing reinsurance contracts have a standard clause allowing either party to issue a PNOC once a year. Once the PNOC is issued, both parties have 90 days to come to an agreement on the contract extension before the contract is formally cancelled.In addition to its annual frequency and the length of negotiations, specific reinsurance contracts may have other terms affecting when PNOCs may be given and how negotiations must be conducted. For example, depending on the contract, the party issuing the PNOC may have the right to withdraw the PNOC at any time, causing the reinsurance contract to continue as originally intended.
Concrete example of a PNOC
Michael is the operator of an insurance company focused on condominium insurance. Recently, he has been concerned about an increase in claims related to canine passive. To mitigate this risk, he decided to reinsure himself with another insurer more comfortable with canine risks.
After a thorough review of Michael’s affairs, the reinsurer decided he was not receiving adequate premiums for the dog risks he had agreed to take. Because of this, they issued a PNOC to Michael’s company and demanded that they renegotiate their contract to include additional compensation. Under their reinsurance agreement, both parties have the right to issue PNOCs once a year and agree to allow 90 days to reach an agreement. Their contract also allows both parties to withdraw their PNOC at any time during those 90 days.