Insolvency Clause
The insolvency clause requires the reinsurer to continue paying its share of a loss to the cedent's insolvency estate even if the cedent becomes insolvent and can no longer settle policyholder claims in full.
- Clause type
- Condition
- Origin/Market
- Reinsurance market
- Favours
- Insured
- Negotiability
- Market standard
Purpose
Reinsurance is fundamentally a contract between cedent and reinsurer from which policyholders derive no direct rights (no cut-through absent a specific clause). If the cedent becomes insolvent, the reinsurer could otherwise argue that payment is only due once the cedent has actually paid the policyholder – something that practically never happens in full once an estate is in liquidation. The insolvency clause removes this defence.
Effect and limits
The reinsurer pays its share to the receiver or liquidator regardless of the actual payment status to policyholders; the funds flow into the general estate and do not necessarily benefit only the affected policyholders. In the United States the clause is required by regulation for a cession to qualify for “credit for reinsurance” in solvency supervision.
Negotiation and practice
Because the clause is regulatorily mandatory or market standard in many jurisdictions, there is little room to negotiate whether it applies; details such as the receiver’s notification duties and time limits for filing claims are nonetheless specified contractually.
Legal basis
- US: NAIC Credit for Reinsurance Model Law