by John Darer CLU ChFC MSSC RSP CLTC
Reinsurance structured settlements are an alternative means of risk transfer funding future periodic payment obligations by insurance companies.
In general, reinsurance is a risk management tool for an insurance company to protect itself from financial disaster by passing on the risk to other companies. Using reinsurance redistributes or diversifies the risk associated with the business of issuing policies by allowing the reinsured insurance company to show more assets by reducing its reserve requirements.
Reinsurance in a settlement context as a structured settlement alternative
In a structured settlement context, reinsurance is a contractual transaction between insurers in which the liability of one insurer is exchanged for another. With either a traditional structured settlement or a reinsurance structured settlement, a claim is settled with consideration that includes a promise of future periodic payments.
Then as the underlying claim is closed, the periodic payment obligation is transferred by way of a qualified assignment [traditional structure for damages that qualify under IRC 104(a)(1) or IRC 104(a)(2) ], a non-qualified assignment [for taxable damages or elements of damages that do not qualify under the aforementioned sections of the Internal Revenue Code] or a reinsurance agreement. The future period payment obligation in each case is funded with a single up-front payment, or payments, if the transfer is to more than one company for diversification purposes.
A periodic payment reinsurance agreement can be executed as a two party reinsurance agreement (just between insurers) or a three-party reinsurance agreement that includes the claimant, where the claimant agrees to look to the reinsurer in lieu of the insurer/reinsured much like the way the claimant would look to the assignee when a qualified assignment is completed.
Last updated June 15, 2021