The effect of a cut-through is to allow the insured or the loss payee to collect the reinsurance recoverables directly from the reinsurer in the event that the insurer becomes insolvent. The purpose of this article is to examine the competitive aspects of cut-throughs and guarantees, form and record issues, insolvency clauses and credit for reinsurance laws and the impact of receivership policy and case law. Competitive Aspects Loss payees and sophisticated insureds often have size and rating standards which they use in selecting or approving insurers. Those insurers which do not meet these standards are not competitive for these potential clients. Cut-throughs and guarantees, however, allow such primary insurers to be competitive by, in effect, borrowing the size and rating of their reinsurers.
Increased competition is usually beneficial to the marketplace.
Many reinsurers are quite concerned about the risks inherent in cut-throughs and guarantees but in a very competitive marketplace, they are forced to offer them. Mr. Hall is a former insurance and reinsurance executive. Copyright Robert M. Hall 2000. There are no standard forms for cut-throughs and guarantees and many versions circulate in the industry. In some cases, they take the form of a clause in the reinsurance contract.