Insolvency Set-Off In The Reinsurance Context In Different Jurisdictions

In the reinsurance context, a usual query that arises in almost any single reinsurance transaction or contract where some money is advanced or handed over between the parties is whether it is possible to set-off mutual debts within an insolvency proceeding.

Set-off is an equitable right that allows the parties to a contract to cancel or offset mutual debts to each other by asserting the amounts owed, subtracting one from the other and paying only the balance.

The interest of the parties to set-off amounts arises, for example, in VIF (Value in Force) transactions, which imply monetizing the value in force of an insurer's individual life risk portfolio to allow such insurer to exchange the expectation of future cashflows for an upfront amount of capital. These VIF transactions, quite frequent in Europe in the last years, are structured through a reinsurance treaty whereby the cedant cedes the defined book to the reinsurer in exchange of an upfront reinsurance commission reflecting the assessment of the future profits expected to arise from such defined book of business. At the signing date of a VIF, the reinsurer shall pay a (usually) very high reinsurance commission, whereas the cedant pays an initial premium.

The right of set-off is particularly relevant in those cases where the cedant transfers the reserves to the reinsurer to enable the reinsurer to pay the reinsured claims. In these cases, the reinsurer is usually interested in being able to offset the reserves against amounts due by the cedant, especially in case of insolvency of the cedant.

This same problem arises in those cases where a reinsurance treaty provides for a premium withheld account, whereby the insurer withholds the periodic premiums collected from the policyholders up to the end of the period foreseen in the reinsurance contract in order to guarantee the fulfilment of the reinsurer's obligations. In such case, it is the cedant who needs to be entitled to offset the infringements of the reinsurer (unpaid reinsured claims) with the funds withheld.

The possibility for the parties to a reinsurance contract to offset mutual debts when one of the parties is insolvent is dealt with differently in the different European jurisdictions. Please find a brief description of the situation in Spain, the United Kingdom, France and Italy.

Spain

The possibility of offsetting payments is expressly regulated under articles 1195 to 1202 of the Spanish Civil Code. According to these articles, set-off is permitted when two persons or entities are reciprocally creditors and debtors of each other, provided that the following requirements (set out under Article 1196 of the Civil Code)...