Contract reinsurance is a contract between the receptive insurance company and the reinsurer who agrees to accept the risks of a predetermined class of insurance over a specified period of time. By signing a reinsurance contract, the reinsurer and the insurance company that boasts of it indicate that the business relationship is likely to be long-term. The long-term nature of the agreement allows the reinsurer to plan how he can make a profit because he knows the type of risk he is taking and is familiar with the outgoing company. In a surplus agreement, also known as “non-proportional reinsurance,” the insurer that has divested retains some liability in the event of a loss. It pays the reinsurance company a fee covering an amount greater than that deduction, and this insurance coverage is generally subject to a fixed limit. Overruns in claims agreements are often more economical in terms of reinsurance premiums and administrative costs. The divested entity may request excess reinsurance to limit the losses it may cause due to a small number of large claims due to random fluctuations in the experience. In a 9-line surplus contract, the reinsurer would then accept up to $900,000 (9 lines). So if the insurance company spends a policy for $100,000, they would keep all the premiums and losses of that policy. If they issue a $200,000 policy, they would give the reinsurer half of the premiums and losses (1 line each).
In this example, the ceding`s maximum automatic depreciating capacity would be USD 1,000,000. Any larger policy would require optional reinsurance. The reinsurer`s liability generally covers the entire life of the original insurance once it is written. However, the question arises as to when one of the parties will be able to cease reinsurance for future new transactions. Reinsurance contracts can be written either on an ongoing or “term” basis. A permanent contract does not have a predetermined deadline, but as a general rule, each party can terminate 90 days or change the contract for new transactions. A due agreement has an integrated expiry date. It is customary for insurers and reinsurers to maintain long-term relationships that span many years. Reinsurance contracts are generally longer documents than discretionary certificates, which contain many of their own conditions, which differ from the conditions of the direct insurance policies they reinsure.
However, even most reinsurance contracts are relatively short documents, given the number and diversity of risks and divisions that re-insure contracts and transaction dollars. They are highly dependent on industry practice. There are no “standard” reinsurance contracts.