Protecting against reinsurer default in Europe: an overview of current practices

A current feature of the economic climate has been the further development of contractual provisions within insurance and reinsurance policies which aim to protect insureds against (re)insurer default. Insureds are, understandably, concerned about credit risk and the potential for counterparty insolvency and various types of protection are now a frequent point of negotiation where such clauses may have, until recently, been overlooked, says Ashley Prebble, an insurance partner at Norton Rose LLP. Amongst the protections being negotiated are collateralisation techniques, downgrade and cut-through clauses. Managing capital efficiently and monitoring counterparty exposures are critical in the current economic climate. But, as Mr Prebble points out, great care needs to be taken to ensure that these instruments operate as the parties intend

The Reinsurance Directive prohibits any EU State from requiring reinsurers from other States to post collateral with cedants in order to obtain capital relief. Despite the abolition of collateral requirements between EU Member States, parties can still provide contractually for security for reinsurance claims.