What is a Reinsurance Agreement?
Reinsurance in the United States is regulated at state level. Whether a ceding insurer can take balance sheet credit for reinsurance ceded depends on the reinsurer's status under the NAIC Credit for Reinsurance Model Law, which drives whether collateral is required. The 2017 and 2018 Covered Agreements with the European Union and the United Kingdom, and the resulting 2019 model law revisions, removed collateral requirements for qualifying reciprocal jurisdiction reinsurers. Disputes are almost always arbitrated.
About the Reinsurance Agreement
A Reinsurance Agreement transfers part of an insurer's risk to a reinsurer in exchange for premium. In the United States its regulatory value depends on whether it supports credit for reinsurance under the applicable state law, and its commercial value depends on how precisely it interlocks with the underlying policies.
When do you need this document?
You need one when an insurer wants to write beyond its own appetite or capital, to protect results against a single large loss or an accumulation, or to support entry into a new class. Treaty cover suits a portfolio written automatically; facultative cover suits an individual risk the treaty cannot absorb.
What does it cover?
The agreement defines the business covered and the structure, whether a proportional share or a layer attaching above a retention, and sets premium, adjustments and exclusions. The provisions that decide recoveries are operational: whether the reinsurer follows the cedent's fortunes and settlements, what claims cooperation applies, and how losses aggregate into an occurrence, which determines how many retentions and limits apply. It also covers reports, records access, offset, the insolvency clause, any collateral or funds withheld arrangement, and arbitration.
Common pitfalls
The classic failure is a gap between the reinsurance and the underlying policies, so the cedent pays a claim its own wording covers but the reinsurance excludes. Back to back drafting is the only cure. The second is aggregation: an occurrence definition that does not match how losses actually arrive can multiply retentions, and on a catastrophe it is usually the largest number in dispute. The third is omitting or weakening the insolvency clause, which can undermine credit for reinsurance and therefore the capital benefit the cedent bought the cover for.
Governing law
Applicable law
This Reinsurance Agreement is drafted to comply with United States law. Key legislation includes:
- NAIC Credit for Reinsurance Model Law and Regulation, as adopted by state: Determines whether the cedent may take balance sheet credit for reinsurance ceded. Status as an authorized, certified or reciprocal jurisdiction reinsurer decides whether collateral such as a trust or letter of credit is required
- State insolvency clause requirements: Most states require a reinsurance agreement to provide that reinsurance is payable to the cedent or its estate without diminution on insolvency. An agreement omitting it can fail to support credit for reinsurance
- Federal Arbitration Act, 9 U.S.C. 1 et seq.: Reinsurance disputes are usually arbitrated. The Act governs enforceability of the clause and sets the narrow grounds on which an award can be vacated
- McCarran-Ferguson Act, 15 U.S.C. 1011: Provides that state law regulating insurance generally takes precedence over conflicting federal law. In some states this affects the enforceability of arbitration provisions in insurance contracts
- State insurer receivership and liquidation statutes: Govern set-off and the treatment of reinsurance recoverables when a cedent fails. They determine whether balances can be netted, which materially changes exposure
- Covered Agreements with the European Union and the United Kingdom: Together with the 2019 model law revisions, they eliminate collateral requirements for qualifying reciprocal jurisdiction reinsurers, which changes how non-United States capacity is documented
