Category: Reinsurance fundamentals · Reviewed by Taylor Watts, Broker · New Business · Last reviewed 2026-06-05
Collateralised reinsurance is reinsurance whose obligations to the cedant are wholly or partly secured by assets segregated for the cedant’s benefit — typically held in a trust account, as a letter of credit or as funds withheld by the cedant. It is the standard structure for ILS-backed reinsurance and for cover written by unrated or non-admitted reinsurers.
Category: Reinsurance fundamentals Also known as: fully collateralised reinsurance, collat reinsurance Related concepts: reinsurance recoverable, trust account reinsurance, letter of credit reinsurance, funds withheld, insurance-linked securities
Collateralised reinsurance protects the cedant against the credit risk of the reinsurer by ensuring that funds or other liquid assets equal to the reinsurer’s maximum exposure are segregated for the cedant’s benefit and available on demand to satisfy claims. In a fully collateralised structure, the collateral is sized to the contractual limit of cover, so that even in the event of total reinsurer default the cedant’s recovery is assured.
Collateralised reinsurance is the dominant structure for alternative capital — insurance-linked securities, sidecars, catastrophe bonds — where the capital provider is typically a special purpose vehicle without an insurance rating.
Solvency II recognises collateral as a credit risk mitigant when valuing reinsurance recoverables, provided the collateral is legally effective, sized appropriately, held by an unrelated custodian and available to the cedant on demand following a defined default event [1]. The PRA Insurance Rulebook contains detailed expectations on the operational requirements for the recognition of collateral.
UK ISPVs are regulated under the Risk Transformation Regulations 2017 [2], with a fast-track authorisation regime.
The standard collateral structures are: a tripartite trust account (cedant as beneficiary, reinsurer as grantor, bank as trustee); a clean irrevocable letter of credit from an investment grade bank in favour of the cedant; or funds physically withheld by the cedant from premium otherwise payable to the reinsurer. The choice depends on the parties’ preferences, regulatory considerations and cost of capital.
For ILS structures, the collateral is typically held in a defined-term trust funded by the proceeds of bonds or other capital instruments issued by the ISPV, invested in highly rated short-duration securities (Treasury bills, money market funds), and released in tranches as cover expires or losses crystallise.
An illustrative example: a Lloyd’s syndicate purchases £100m excess of £150m catastrophe XL from an ILS catastrophe bond structure. The £100m of bond proceeds is held in a Cayman Islands trust for the benefit of the syndicate; the trustee invests the funds in US Treasury bills. Following a qualifying loss event, the syndicate notifies the trustee, who releases the appropriate amount to satisfy the claim.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-05. Next review: 2026-12-05.
Apex Insurance Brokers Limited. Authorised and regulated by the Financial Conduct Authority, FRN 724952. Registered in England and Wales, Companies House 07014570. This entry provides general information about UK insurance concepts and is not regulated advice. Consult your insurance broker on your specific position.
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