Reinsurance contracts may include a clause that allows the ceding entity to keep the premium payable under the reinsurance contract while reporting it as ceded to the reinsurer, known as “funds withheld.” This practice developed to minimize cash transferred between the ceding entity and reinsurer when the ceding entity expects to pay losses quickly or to mitigate credit risk between the parties. In some finite risk transactions, this practice has expanded to coverages when the loss payments are not expected to occur for several years. Some contracts require the ceding entity to credit the funds withheld account with interest at an above-market rate. In effect, the ceding entity pays the reinsurer an extra amount, but spreads the recognition of that extra amount over many years. That additional cost is recognized by the ceding entity as additional premiums to the reinsurer over the coverage period and included in the risk transfer analysis.

A variation of this approach involves deferred ceding commissions that allow the reinsurer to defer payment of the ceding commission and, thus, earn extra investment income on that amount while the payment is deferred. The extra cost should be considered in the risk transfer analysis. These features also have the effect of reducing financial leverage without the ceding entity losing control of the funds.