Clean cut

Clean cut is the mechanism by which a proportional treaty closes definitively at expiry, leaving no tail: unearned premium and outstanding loss reserves are transferred, against payment, to the following year's treaty and its reinsurers, through the outgoing and incoming portfolio entries. The problem it solves is the endless run-off of a risk attaching treaty, which stays open for two years, produces delayed accounts and prevents anyone saying what a year actually cost until long afterward. Clean cut allows each year to be settled and the business to be read by accounting year rather than by underwriting year. Its cost is valuation risk: the outgoing reinsurer is paid on reserves as estimated at the transfer date, and the incoming reinsurer inherits a liability whose estimate is not its own. Any under-reserving at the point of cut is therefore borne entirely by the incoming party, which makes that valuation the main object of the negotiation.

A 2026 property quota share closes clean cut at December 31. The outgoing portfolio transfers 18.4 million euros of unearned premium and 26.1 million of loss reserves to the 2027 reinsurers, against equivalent payment. An audit in 2028 reveals a 3.7 million reserve shortfall as at the cut date, borne entirely by the incoming reinsurers, with no recourse against the outgoing ones.

Clean cut, Coupure nette, Clôture nette, Cut-off avec transfert de portefeuille