Reinsurance tutorials #15
What is cash loss?
An insurer who has to settle a major claim may not always have the sufficient cash or does not want to release significant cash from its treasury. Moreover, given that in most proportional treaties, the accounts are rendered quarterly, the Ceding party may need cash before the end of the year or the account period.
The reinsurance contract may specify within a clause that when a claim amount exceeds a predetermined amount (called cash loss), the Ceding party is entitled to request from the Reinsurer to effect payment within a period of time set out (usually 15 days), provided that the Ceding party gives the required evidence and documentation on the claim.
A cash loss is a provision, common in proportional reinsurance, which allows the Ceding party to claim and receive immediate payment for a large loss without waiting for the usual periodic payment to occur.
As such, a cash call is interesting; it may contribute to reducing the primary insurer’s treasury needs. And the cash loss must be represented clearly in the Accounts to make sure it will not be counted twice.
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