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. Insolvency Clause

    An insolvency clause is a clause stating that the reinsurer must ...
  2. Reinsurance Ceded

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

    Reinsurance Credit is an accounting entry made by an insurer ...
  4. Intermediary Clause

    An intermediary clause is a provision in a reinsurance contract ...
  5. Schedule F

    Schedule F is a section in an annual insurance statement in which ...
  6. Treaty Reinsurance

    Treaty reinsurance is a type of reinsurance in which the reinsurance ...
Related Articles
  1. 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.
  2. Insurance

    Third Point Reinsurance Notes Largest Profit in Years

    Third Point Reinsurance saw a tripling of net income in the second quarter of 2016 over last year.
  3. 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.
  4. Trading

    Insurance Carriers Breaking Down Ahead of Irma

    Property-casualty and reinsurance companies have broken key support levels ahead of Hurricane Irma's expected U.S. landfall.
  5. 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.
  6. Insurance

    What To Do If Your Insurance Won't Pay

    Before paying for coverage, find out what you need to do to ensure you get paid.
  7. Insurance

    Life Insurance: How Long Does It Take To Get Paid?

    How to file for a life insurance payout – and how long it takes to receive it. Plus, new ways to plan for payments that provide an income stream.
  8. Insurance

    Dividend-Paying Whole Life Insurance: What to Know

    Many whole life insurance policies pay dividends. Here are what policyholders need to consider.
  9. Financial Advisor

    The 6 Biggest Life Insurance Companies in Canada (GWO.TO, SLF)

    Read about the biggest life insurance companies in Canada, and learn about their business operations and the types of products they offer.
  1. What Is an Alienation Clause?

    An alienation clause when in reference to insurance policies, mortgages or commercial loans stipulates certain things to ... Read Answer >>
  2. What is a "force majeure"?

    A force majeure is derived from the French term meaning "greater force" and refers to any natural and unavoidable catastrophe. ... Read Answer >>
  3. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  4. How does the insurance sector work?

    Learn more about the insurance sector, a historically safe place for equity investors and the home of some of the largest ... Read Answer >>
  5. What is the financial services sector?

    The financial services sector consists of a diverse group of companies that goes beyond banks and credit unions. Read Answer >>
  6. Can an Insurance Company Deny Coverage?

    Insurance isn't always as straightforward as other products, and insurers can deny coverage in many different instances. ... Read Answer >>
Trading Center