Master Certificate

Master Certificate

Investopedia / Jake Shi

What is Master Certificate

A Master Certificate is a document that formalizes a reinsurance agreement. These certificates provide details about the parties involved in the agreement, the risks covered, and the laws that the agreement is governed under. If the ceding insurer and reinsurer make amendments to the reinsurance agreement, they may restate the master certificate to reflect the changes.

Understanding Master Certificate

Agreements between insurers and reinsurers tend to be much less complicated than agreements between insurers and policyholders. This is because insurers and reinsurers are said to be sophisticated companies that understand the nuances of the industry and the legal requirements of each party, while policyholders are typically not experts in insurance and thus need to understand all aspects of what they are agreeing to. Details of the reinsurance agreement are found in the master certificate.

Key Takeaways

  • A master certificate is a agreement between insurers and reinsurers that defines terms and states obligations of both parties.
  • It is relatively simple as compared to the agreement between insurance companies and policyholders.
  • Reinsurers have the ability to terminate the agreement if there is a change in ownership interest or a ceding insurer is downgraded by a ratings agency.

Obligations of the Parties

A master certificate is used to define all the terms of a reinsurance treaty. It outlines obligations of the reinsurer and the insurer, how funding and reimbursement are handled, and how notifications of policies that come within the scope of the agreement are to be delivered. For example, the master certificate may say that the insurer must provide the reinsurer with a statement indicating the amount of loss reserves applicable to the reinsurer.

The certificate also indicates how disputes between the ceding insurer and reinsurer are to be handled, and how errors and omissions are to be communicated by one party to the other. In some cases the insurer may have the right to terminate the agreement if a particular event occurs, such as the reinsurer failing to maintain acceptable capital. The agreement may also be terminated if the reinsurer receives a poor rating from a ratings agency. The reinsurer also has the ability to terminate the agreement if the ownership interest of the insurer changes or if the ceding insurer is downgraded by a ratings agency.

An insurance company credit rating is the opinion of an independent agency regarding the financial strength of an insurance company. An insurance company’s credit rating indicates its ability to pay policyholders’ claims. It does not indicate how well the insurance company’s securities are performing for investors. In addition, an insurance company’s credit rating is considered an opinion, not a fact, and ratings of the same insurance company can differ among rating agencies.

"Five independent agencies—A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody’s and Standard & Poor’s—rate the financial strength of insurance companies," according to the Insurance Information Institute.

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  1. Insurance Information Institute. "How to Assess the Financial Strength of an Insurance Company." Accessed Jan. 30, 2021.