Contract reinsurance is one of the three main types of reinsurance contracts. The other two are optional reinsurance and excess reinsurance. A reinsurance contract under which the receiving company has the option to divest and the reinsurer is required to assume the risks of a defined class, provided the risks are covered by the contractual guidelines. In the case of non-proportional reinsurance, the reinsurer is liable if the insurer`s losses exceed a certain amount designated as a priority or retention limit. As a result, the reinsurer does not have a proportionate share of the insurer`s premiums and losses. The priority or retention limit is based on a type of risk or a whole category of risk. A common form of proportional reinsurance contract, under which the amount of each assignment is defined as the amount of gross liability (insurance) higher or “supernumerary” of an agreed net liability up to the limit of liability (reinsurance). Often, the contract provides for a maximum net link, as the resulting company has the option of opting for a reduction in the conservation of individual risks. The amount of the first surplus reinsurance is limited to a fixed multiple of the chosen deduction. Higher surplus contracts, referred to as “second,” “third,” etc., may provide the receiving company with an additional reinsurance capacity greater than that of the previous surplus contract, plus its actual net commitment. A term commonly used in marine insurance, the interests of the insured remain covered in case of circumstance which, without prior agreement, would cancel the insurance coverage.
Most of the above examples relate to reinsurance contracts covering more than one policy (contract). Reinsurance can also be acquired by policy, in which case it is called optional reinsurance. Optional reinsurance can be established either on a co-payment or on the basis of a surplus of losses. Optional reinsurance contracts are often recalled in relatively short contracts, called discretionary quotas, and are often used for significant or unusual risks that, because of their exclusions, are not part of standard reinsurance contracts. The duration of an optional agreement coincides with the duration of the policy. Optional reinsurance is generally acquired by the insurer that took out the original insurance policy, while contractual reinsurance is generally acquired by an insurance company executive. Almost all insurance companies have a reinsurance program. The ultimate goal of this program is to reduce their risk of loss by transferring some of the risk of loss to a reinsurer or group of reinsurers.