Insurance Cutoff

Insurance Cutoff

Investopedia / Jake Shi

What Is an Insurance Cutoff?

An insurance cutoff is a reinsurance contract provision that prevents the reinsurer from being liable for claims after the contract termination date. An insurance cutoff, also called a cutoff cancellation, defines how long the reinsurer will have financial responsibilities from insurance policies that were in force while the reinsurance contract was in effect.

Reinsurance contracts often have a termination provision included in the contract language in order to define when the financial responsibilities of the reinsurer end. This provision is an important feature because some claims, such as those related to personal injury, may take place years after the reinsurance contract has expired.

Key Takeaways

  • An insurance cutoff is a feature in a reinsurance contract that addresses how long the reinsurer must pay claims after the contract has been terminated.
  • Also called a cutoff cancellation, the insurance cutoff lays out how long the reinsurer is liable to the insured.
  • Some reinsurance contracts are open-ended, meaning that there is no set termination date, while others have a termination date specified in the contract language.
  • An insurance cutoff clause is significant because of the potential for personal injury or other claims to be filed months or years after the contract has expired.

How an Insurance Cutoff Works

Typically, when one of the parties to a reinsurance agreement decides to discontinue the arrangement, they must provide a provisional notice of cancellation to the counterparty to the agreement. 

Also known as a cutoff cancellation, the insurance cutoff language in the contract will specify how much longer the reinsurer continues to have financial responsibilities to the insured. This language becomes important when there is a potential for a claim related to personal injury, which can oftentimes occur well after a reinsurance contract expires.

Some reinsurance contracts are open-ended, meaning that there is no set termination date, while others have a termination date specified in the contract language. The contract may specify that the reinsurer’s liability is limited to the natural expiration of the ceded policy, meaning that the reinsurer is not responsible for liabilities after the policy is renewed.

Some reinsurance contracts are open-ended, lacking a termination date, while others have a termination date written into the contract.

Insurance Cutoff and The Run-Off Provision

The termination clause of a reinsurance treaty is a run-off provision that determines the liability of the reinsurer after the contract comes to end. The two primary options are to have the reinsurer remain liable for claims made from occurrences that take place after the contract is terminated, or to not hold the reinsurer liable for such claims. Reinsurers prefer to have their liabilities end when the contract ends because it eliminates their risk exposure.

Some reinsurance agreements limit the reinsurer’s liabilities to twelve months after the reinsurance treaty expires, while others hold the reinsurer responsible until all the policies in effect during the treaty have naturally expired, been terminated, or canceled.

The type of reinsurance contract ultimately determines the likelihood of an insurance cutoff being offered. In some cases, as with multi-year policies, the reinsurer may be responsible for liabilities on a staggered basis. The coverage limit may be set on an annual basis.

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