Funds Held Reinsurance Explained

Funds Held reinsurance Explained

January 22, 2026

Article Summary

• Funds held allows the cedant to retain the reinsurer’s share of premium, improving liquidity and reducing collateral needs while crediting interest back to the reinsurer.
• The structure is most effective in quota share treaties, where premium and loss flows are steady and net settlements simplify administration.
• Both parties benefit: the cedant earns investment income and avoids cash transfers, while the reinsurer reduces financing costs and aligns cash flow with long‑tail loss emergence.

What is funds held reinsurance?

Funds held is a key feature of reinsurance agreements that determines how cash moves between insurers and reinsurers. It can affect liquidity, alter investment income, and change collateral needs in ways that matter for both parties. Its impact is especially noticeable in quota share treaties, where premium and loss activity is more consistent. Understanding why funds held play such a central role helps make the rest of the structure far easier to follow.

Funds held reinsurance is when the ceding insurer keeps the premiums that would normally be paid to the reinsurer, instead of transferring the cash immediately.

Why would the reinsurer choose this?

• Often reinsurers don’t need the cash immediately, and the reinsurer may also receive compensation from the investment income. The funds held will keep the cash with the ceding insurer until it’s actually needed to pay claims.
• It can also act as a substitute for letters of credit, trust accounts and other collateral requirements, which would reduce the cost and administrative burden for the reinsurer.

Why would the ceding insurer choose this?

• They can retain the cash until losses occur.
• The ceding company will earn investment income on the funds held balance (the reinsurer is compensated with an interest rate).

Funds held are more common in quota share reinsurance.  Why?

In quota share reinsurance, things are more consistent.

• The cedant will cede a fixed percentage of premiums, losses and expenses.
• The premiums are large and flow continuously.
• Losses are paid by the cedant first then reimbursed by the reinsurer.

Funds held will simplify this process because only the net amount is settled periodically.

• The cedant will keep their insurer’s share of premium.
• As losses occur, the cedent deducts them from the funds held balance.

This reduces friction and collateral needs. If a reinsurer’s share of premium is $10m, the cedant may hold that $10m and credit interest, instead of wiring it out and then requesting reimbursement for losses later.

Funds held would be less common in an excess of loss treaty because while premiums are usually fixed and paid upfront, losses are also infrequent and large. It may still be used as collateral in excess of loss treaty agreements if the reinsurer is offshore, or the cedant wants collateral for recoverables.

Ceding commission

To compensate the cedant for acquisition costs and overhead, the reinsurer will also pay a ceding commission. The ceding insurer will treat this as income, while the reinsurer will treat this as expense. The ceding commission is typically recognized in proportion to the ceded written premium.

We can look at a scenario and see the impact of how that looks on the face of the financials for both a ceding insurer and their insurer.

Scenario:

A ceding insurer enters into a 40% quota share treaty. During the first quarter:

• Gross written premium: $25 million
• Ceded premium (40%): $10 million
• Ceding commission: 10% of ceded written premium → $1 million
• Losses paid by the cedant: $4million
• Reinsurer’s share of losses (40%):$1.6 million
• Funds held interest rate: 4%annual (assume $100k interest accrues for the quarter)

Under a funds‑held arrangement, the cedant keeps the $10 million of ceded premium instead of sending it to the reinsurer. As losses occur, the cedant deducts the reinsurer’s share from the funds‑held balance.

The entries for the ceding insurer are as follows:

The impact to the funds held liability on the cedant financial statements are as follows:

The entries for the reinsurer are as follows:

The impact to the funds held receivable on the reinsurer financial statements are as follows:

In summary, funds held is a reinsurance arrangement where the ceding insurer keeps the reinsurer’s share of premium instead of sending it immediately. The reinsurer records the amount as an asset, and the cedent hold sit as a liability.

Reinsurers choose funds held because it reduces collateral requirements, lowers financing costs, and aligns cash flow with long tail loss development.

Regardless of the type of reinsurance agreement you’re looking at, funds held can be a useful tool to help manage collateral requirements and cash flow needs.

Funds Held Q&A

What problem does funds held solve in reinsurance?

It reduces the need for collateral or frequent cash transfers by letting the cedant hold the reinsurer’s share of premium and settle only the net amount over time.

Why is funds held more common in quota share treaties?

Quota share treaties have predictable, continuous premium and loss activity. Funds held streamlines this by allowing the cedant to offsetlosses directly against the retained premium balance.

How does funds held affect financial statements?

The cedant records a funds held liability, while their insurer records a funds held asset. Investment income is credited to their insurer, and losses are deducted from the balance as they occur.

For further guidance, please contact us.  Larson and Company has developed a suite of services specifically to serve the needs of insurance companies.