Reinsurance tutorials #23
What is cut-off?
Cut-off, also known as clean cut, is a reinsurance contract provision that prevents the reinsurer from being liable for claims after the contract termination date. An insurance cut-off, also called a cut-off cancellation, defines how long the reinsurer will have financial responsibilities from insurance policies that were in force while the reinsurance contract was effective.
A clean-cut accounting system works on a portfolio transfer basis. By returning a Premium Portfolio and a Loss Portfolio to the ceding party, or by transferring them to the following year’s reinsurers, the reinsurer shall not be further liable for any losses after the date of termination and all liabilities are moved forward into the next Treaty period. The clean-cut provision simplifies the Treaty account procedures and it is best suited for classes of business which are short tail, and claims can be settled at light speed.
Let’s assume an engineering policy incepting in June 2010 and ending in Dec 2011, representing an 18-month policy with a 3-months maintenance period. In a clean-cut accounting scenario, the unexpired portion of the premium and outstanding losses are taken from 2010 Treaty reinsurers and transferred to 2011 Reinsurers. We call this an ‘In & Out’ Portfolio. Similarly, if a loss is settled only in the year 2012 and the unexpired portion of the premium and the outstanding claims are transferred to 2012, reinsurers then become liable for payment of the losses. The old treaty reinsurers will not be liable for the losses which occurred during their treaty period.
As previously mentioned, this type of accounting works well for classes such as property which have annualized policies, in areas of business such as engineering where the policy periods are longer, and most of their claims only occur at the end of the policy period. In these cases, clean-cut accounting will not be suitable as claim recovery will consume a lot of time and huge administrative work will be required.
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