What is 'Cut-Through Clause'

A cut-through clause is a reinsurance contract provision that allows a party, other than the ceding company and reinsurance company, to have rights under the agreement. Cut-through clauses are often triggered by specific events, such as when a ceding company becomes insolvent.

BREAKING DOWN 'Cut-Through Clause'

The relationship between the ceding company and reinsurer changes when a cut-through clause is present. A reinsurance contract is made between a ceding company, such as an insurance company, and a reinsurance company. In exchange for a portion of the premiums generated by the ceding company’s underwriting activities, the reinsurance company agrees to indemnify the ceding company from claims made. This contractual relationship is strictly between the ceding company and the reinsurer, not between parties not included in the contract, such as policyholders. However, this changes in the presence of a cut-through clause.

Cut-through clauses are most commonly attached to reinsurance agreements when the ceding company is not in good financial shape, as the insured parties obtaining rights under the clause are most in need of protection when the insurance company is insolvent or cannot make payments on claims, or is liquidated by insurance regulators.

Policyholders like the added protection provided by cut-through provisions. Rather than having to work with insurance regulators to make claims against an insolvent insurer, policyholders can work directly with the reinsurer. Ceding insurers find the clause useful in that it makes the reinsurance company guarantee claims payments, which allows a company that may not typically be able to attract larger commercial clients to seem more stable and thus more attractive. Reinsurers find the clause useful because it can allow them to provide services in areas where it may not be licensed.

From the reinsurer’s standpoint, a cut-through clause functions as a competitive tool that enables the company to capture a certain type of reinsurance business. However, a reinsurer may be caught between conflicting demands for reinsurance recoverables from receivers, as well as from insureds and loss payees.  As a result, there is a significant effort to obtain specific statutory protection against double payments with respect to cut-throughs and guarantees is critical to reinsurers, insurers, insureds and loss payees in order to achieve the intended outcomes.

Cut-through clauses differ from cut-through endorsements. The latter is a side agreement between the policyholder and the reinsurer, and can be used in other circumstances such as when a reinsurer is not licensed to provide reinsurance in a particular area.


  1. Assumption Endorsement

    Assumption Endorsement states that, if the original insurer becomes ...
  2. Reinsurance Ceded

    Reinsurance ceded is the portion of risk that a primary insurer ...
  3. Ceding Company

    A ceding company is an insurance company that passes a part or ...
  4. Commutation Agreement

    A commutation agreement is a reinsurance agreement in which the ...
  5. Treaty Reinsurance

    Treaty reinsurance is a type of reinsurance in which the reinsurance ...
  6. Aggregate Stop-Loss Reinsurance

    In aggregate stop-loss reinsurance, losses over a specific amount ...
Related Articles
  1. Insurance

    When Things Go Awry, Insurers Get Reinsured

    Guru Warren Buffett is making this sector popular. Learn more here.
  2. Insurance

    The Reinsurance Industry: An Inside Look

    Low demand and high regulatory pressures may be problematic for the global reinsurance market following the shrinking margins and declining demand of the first half of 2016.
  3. Tech

    The Reinsurance Industry: An Inside Look (BRK.A)

    Warren Buffett has a major influence on the global reinsurance market, which has seen momentum in 2016 for higher revenue.
  4. Taxes

    2 Ways Hedge Funds Avoid Paying Taxes

    Learn about two strategies hedge funds use to minimize their tax liabilities. Read why some hedge funds are in the reinsurance business in Bermuda.
  5. Insurance

    Life Insurance Clauses Determine Your Coverage

    Understanding these key parts of your policy will help you to ensure that your family will be covered.
  6. Insurance

    Understanding your insurance contract

    Learn how to read one of the most important documents you own: your insurance contract.
  7. Insurance

    The 5 Biggest Canadian Insurance Companies

    Learn more about the insurance industry as a whole, how it functions in Canada, and the five largest Canada-based insurance companies.
  8. Financial Advisor

    Mutual Vs. Publically Traded Insurance Companies

    Should you buy your insurance policy from a mutual or publically traded insurance company?
  9. Insurance

    Is Loan Protection Insurance Right For You?

    Loan protection insurance can keep you from defaulting on your loans when you're in financial trouble, but it's not for everyone. Learn more on how it can help you.
  1. What is an alienation clause?

    Whether used in reference to insurance policies, mortgages or commercial loans, an alienation clause stipulates that should ... Read Answer >>
  2. How is the consumer price index (CPI) used in market escalation contracts?

    Understand the purpose of market escalation contracts and learn how the consumer price index (CPI) is often used to make ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center