Reinsurer Setoffs And Policyholder Cut-Throughs In Insurer Insolvency Proceedings

Overview: The enforceability of reinsurer setoffs and policyholder cut-throughs in insurer insolvency proceedings is of great importance to both reinsurers and receivers. Both mechanisms allow claimants against the insurer to bypass the receivership’s claims process and to retain or appropriate for themselves assets that might otherwise flow to the estate. Given the pervasiveness of reinsurance in today's insurance market, insurer insolvencies often involve large claims by and against reinsurers. As discussed in this article, the ability to offset these claims, and to pay only the net amount owed, is crucial to reinsurers and is resisted by receivers. While setoff disputes usually involve only the reinsurer and the receiver, cut-throughs involve a trio of interests. The receiver and the insured holding the cut-through each demand immediate payment from the reinsurer, but the reinsurer wants to avoid paying twice. Setoffs and cut-throughs are discussed separately below, but potential overlap exists. The setoff of reinsurance obligations is a matter of strong interest to receivers and reinsurers. One should continue to expect battles between these competing interests at the NAIC model law committee level, at the state legislative level, and at the judicial level. The reinsurer that has issued cut-throughs faces substantial risks upon the insolvency of the insurer.

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Format: HTML | Date: Jan 2003 | Pages: 1