Insolvency clause

An insolvency clause provides that the reinsurer owes its share even if the cedant has not actually paid the loss. In liquidation the reinsurer pays the estate its full share, computed on the loss amount allowed in the proceeding, not on the reduced dividend the liquidator will pay policyholders. Without the clause, a reinsurer could argue that its cover reimburses an outlay the cedant never made, and pay only the distribution percentage. Reinsurance would then lose its point at exactly the moment it is most needed. The clause therefore protects the policyholders of a failed carrier: reinsurance must remain an asset of the estate, recoverable in full. Statute or regulators impose it in many jurisdictions, notably in the United States, where a treaty without it earns no reinsurance credit on the cedant's balance sheet. It is commonly paired with an offset clause, and how the two interact determines what the reinsurer may withhold for unpaid premium.