By choosing a particular type of reinsurance method, the insurance company may be able to create a more balanced and homogeneous portfolio of insured risks. This would make net results more predictable (i.e. reinsurance). This is generally one of the objectives of reinsurance systems for insurance companies. While all the benefits of the optional system and quotas are available, the disadvantages of these two types are lacking. The significant benefits of the surplus contract may be in the second example that the direct company could retain the entire $100,000, thus earning the full premium. But the contract prevents him from doing so, since he must give in according to the percentage set. Contract reinsurance is insurance acquired by one insurance company by another insurer. The company that issues the insurance is the Cedent which transmits all the risks of a certain category of policies to the buying company that reinsurer. The agreement may be a “quota” or “excess reinsurance” (also known as the line quota or variable quota contract surplus) or a combination of the two. As part of a quota participation agreement, a fixed percentage (for example. B 75%) all insurance policies are reinsured.
As part of a surplus participation agreement, the company decides on a “conservation limit”: say $100,000. The company that has withdrawn retains the total amount of any risk, up to a maximum of $100,000 per policy or per risk, and the excess above that retention limit is reinsured. There are different types of contractual agreements. The most frequent proportional contracts are cited, in which a percentage of the outgoing insurer`s initial policies are re-insured up to a limit. Not all policies that cross borders are covered by the reinsurance contract. In the case of non-proportional reinsurance, the reinsurer only pays if the insurer`s total claims exceed a declared “preservation” or “priority” amount over a period of time. For example, the insurer can accept a total loss of $1 million, and it buys a $4 million reinsurance layer that goes beyond that $1 million. If there were to be a loss of $3 million, the insurer would bear $1 million of the loss and recover $2 million from its reinsurer. In this example, the insurer also retains a loss surplus of more than $5 million, unless it has acquired another excess layer of reinsurance. Optional reinsurance is generally used for high quality or dangerous risks, as policies can be adapted to certain circumstances.