Reinsurance

The host government may have a rule that all insurances have to be written locally. The primary insurers are likely to reinsure as they may not otherwise be able to meet a major claim. Lenders may want to control the percentage of liability that local insurers reinsure (by insisting on a “maximum retained percentage” for a local insurer – above this percentage, the local insurer would be required to reinsure). Lenders will usually specify credit ratings for reinsurance – although this is not great comfort for the project company as it will have to rely on the credit worthiness of the local insurer. In order to reduce this risk, project company can: -

• require local insurers to give project company a security assignment of reinsurance policies –may not be possible to under local law to do this and insurers may themselves be subject to negative pledges
• require contractual cut-through agreements – tripartite agreement between local insurer, reinsurer and project company providing that in the case of a claim project company may call on reinsurer to pay it direct – lenders usually take security interest in project company’s interest in the agreement. They may not be possible under local insurance law, they may not be enforceable in the case of a bankruptcy because they are contractual and so may be capable of being avoided, and, from reinsurer’s perspective, it may face risk of double payment
• have project sponsors form own captive insurance company in jurisdiction – could then ensure that it only carried out insurance for this project – so all proceeds would be available – this is expensive and time-consuming but may be worthwhile for a huge project – eg major oil companies have done so in some jurisdictions because of lack of capacity in insurance markets for various aspects of business – especially pollution.