Glossary Spotlight: Admitted or Authorized Reinsurance

Definition: Reinsurance for which credit is given in the ceding company's annual statement because the reinsurer is licensed or approved to transact business in the jurisdiction where the risk is located.

Admitted or authorized reinsurance refers to reinsurance placed with a reinsurer that meets the applicable regulatory requirements for recognition by the ceding insurer's jurisdiction. Because the reinsurer is licensed or otherwise approved, the ceding insurer generally can recognize the reinsurance on its statutory financial statements without the same collateral requirements that may apply when reinsurance is placed with an unauthorized reinsurer.

The ability to receive credit for reinsurance is important because reinsurance does not eliminate the ceding insurer's obligation to its policyholders. Instead, the reinsurer agrees to reimburse the ceding insurer for losses covered under the reinsurance agreement. Regulatory rules governing credit for reinsurance determine whether, and under what conditions, the ceding insurer may recognize those recoverables as an asset or reduce its liabilities for statutory accounting purposes.

In captive insurance, the distinction between authorized and unauthorized reinsurance can be particularly relevant when a captive participates in a fronted program. A commercial insurer may issue the policies and then reinsure some or all of the risk to the captive. If the captive is not authorized in the fronting insurer's jurisdiction, the insurer may require collateral—such as a letter of credit or trust—to support the reinsurance recoverable and obtain statutory credit for reinsurance. The captive's regulatory status, therefore, can have a direct effect on the collateral structure and economics of the arrangement.

Credit for reinsurance requirements are governed by the applicable jurisdiction and can vary based on the status of the reinsurer and the structure of the transaction. Captive owners and managers should understand these requirements when evaluating reinsurance arrangements because they can affect collateral obligations, liquidity, and the overall cost of a captive insurance program.

FAQs

Why does admitted or authorized reinsurance matter in a captive insurance program?

A reinsurer's regulatory status can affect whether a ceding insurer receives statutory credit for the reinsurance. This is particularly relevant when a captive reinsures a fronting insurer, because the captive's status may influence whether collateral is required to support the insurer's reinsurance recoverable.

What does "credit for reinsurance" mean?

Credit for reinsurance is the statutory accounting recognition a ceding insurer receives for qualifying reinsurance. Subject to applicable regulatory requirements, it allows the insurer to recognize amounts recoverable from a reinsurer or reduce liabilities associated with risks transferred through reinsurance.

How is admitted or authorized reinsurance different from unauthorized reinsurance?

Admitted or authorized reinsurance involves a reinsurer that is licensed or otherwise approved under the applicable jurisdiction's requirements. Reinsurance placed with an unauthorized reinsurer may still qualify for statutory credit, but additional requirements, such as qualifying collateral, may apply.