What is a Provisional Notice Of Cancellation (PNOC)
A provisional notice of cancellation is a means by which one participant in a reinsurance treaty can notify the other participants of their intention to withdraw from the treaty. This notice is used only for withdrawal from continuous reinsurance contracts, which are typically eligible for cancellation or renewal once a year.
BREAKING DOWN Provisional Notice Of Cancellation (PNOC)
A provisional notice of cancellation (PNOC) allows all parties to a continuous reinsurance treaty the periodic opportunity to assess the contract and either renew or withdraw from it. Most reinsurance arrangements allow for this assessment once a year. Both the reinsured entity and the reinsurer have the right to issue a PNOC. Doing so gives them a 90-day window in which they can formally cancel the contract.
Reinsurance treaties allow insurance companies to spread risk among a pool of reinsurers in order to avoid financial disaster due to unforeseen events. When an insurance company writes a policy to an individual or business, it accepts a certain degree of risk in exchange for premium payments. Successful insurers issue thousands of policies across a variety of classes, thereby exposing themselves to a complex matrix of risks. To mitigate this exposure, insurers buy their own insurance in the form of reinsurance treaties that are typically long-term agreements under which the reinsuring company agrees to cover one well-defined class of policies. Over the course of this contract, the reinsurer will review the insured’s business to assess future risk. The insured firm will review that agreement to determine if it is adversely affecting profitability. This review process coincides roughly with the annual renewal date. If either side is uncomfortable with the existing contract, it will issue a PNOC.
The PNOC Process
Guidelines for the notice of cancellation process are found in the termination clause of the reinsurance contract. The clause will establish a yearly renewal date and the lead time the one party must give the other before reaching a final decision, plus any further stipulations agreed upon by the insurer and insured.
The entity which issues a PNOC to its counterparties has two options when doing so. It can retain the option to withdraw the notice of cancellation if it later becomes satisfied with the treaty. It can also waive the right to withdraw the PNOC, thus forcing the other party to offer a modified contract for renewal. If the parties fail to reach a new agreement, a notice of formal termination will be issued.