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 type of notice is only used in relation to continuous reinsurance contracts, which are those that remain in effect until either party withdraws from the contract. Once a PNOC has been issued, the parties will typically have 90 days in which to renegotiate their contract. If they do not reach an agreement, then the contract will be canceled.
- A Provisional Notice of Cancellation (PNOC) is a legal notice given by one insurance company to another.
- It is used by parties to a reinsurance contract for purposes of renegotiating or exiting their agreement.
- Oftentimes, reinsurance contracts will allow each party to issue one PNOC per year and agree to grant 90 days in which to reach an agreement. Failure to reach an agreement would then result in the termination of the reinsurance contract.
How PNOCs Work
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. Reinsurance treaties 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 its future risk. Depending on the outcome of this assessment, they may or may not decide to continue with the reinsurance contract over the longer term.
Through the reinsurance market, insurance companies can hedge their risks by passing on some of their liabilities to other insurance companies. In exchange, the insurance companies taking on the liabilities will receive a portion of the insurance premiums generated from the underlying insurance contracts. Although some reinsurance contracts remain in effect only for a specified term, others are continuous in that they remain active indefinitely until either party terminates the contract. One of the ways for either party to begin the process of terminating the contract is by issuing a PNOC.
Oftentimes, continuous reinsurance contracts will have a standard clause allowing either party to issue a PNOC once per year. Once the PNOC has been issued, both parties have 90 days in which to reach an agreement on extending the contract before the contract is formally canceled. In addition to its annual frequency and the length of time given for negotiations, specific reinsurance contracts may have other conditions affecting when PNOCs can be given and how the negotiations must be conducted. For instance, depending on the contract, the party who issues the PNOC may have the right to withdraw the PNOC at any time, causing the reinsurance contract to continue as originally planned.
Real-World Example of a PNOC
Michael is the operator of an insurance company focusing on condominium insurance. Recently, he became concerned by a rise in claims relating to canine liabilities. To mitigate this risk, he decided to purchase reinsurance from another insurer who was more comfortable with canine-related risks.
After thoroughly reviewing Michael’s business, the reinsurer decided that they were not receiving adequate premiums for the canine-related risks they had agreed to take on. For this reason, they issued a PNOC to Michael’s company and requested that they renegotiate their contract to include additional compensation. Under the terms of their reinsurance agreement, both parties are entitled to issue PNOCs once per year and agree to grant 90 days in which to reach an agreement. Their contract also allows both parties to withdraw their PNOC at any time during those 90 days.