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    What Is A Facultative Reinsurance Agreement

    Thursday 14th October 2021

    Optional reinsurance treaties are much more targeted. They cover the individual underlying policies and are specific to the policy. An optional agreement covers a specific risk of the transferring insurer. Reinsurers and censors must agree on the terms of each individual contract. Optional reinsurance contracts often cover catastrophic or unusual exposures. Contractual and optional reinsurance contracts may be concluded proportionately or on a loss-overrun basis (or a combination of both). The agreement can be a “quota” or “excess reinsurance” (also known as a surplus contract or variable quota agreement) or a combination of both. Under a quota agreement, a fixed percentage (e.B. 75%) of each insurance policy is reinsured. Under a bonus agreement, the transferring company decides on a “retention limit”: say $100,000. The transferring company retains the total amount of each risk, up to a maximum of $100,000 per policy or risk, and excess above this retention limit is reinsured. Insurance undertakings wishing to transfer the risk to a reinsurer may find that optional reinsurance contracts are more expensive than contractual reinsurance.

    Indeed, contractual reinsurance covers a “book” of risks. This is an indicator that the relationship between the transferring company and the reinsurer is likely to become a long-term relationship (as opposed to if the reinsurer only wants to cover one risk in a one-time transaction). While rising costs are a burden, an optional reinsurance agreement may allow the transferring company to reinsur specific risks that it may not otherwise be able to assume. Reinsurance companies offer insurance to other insurers and protect themselves against circumstances where the traditional insurer does not have enough money to repay all claims against its written policies. Reinsurance contracts exist between a reinsurer or acquiring company and the reinsured or transferring company. In fact, a standard insurer can further spread its own risk of loss by entering into a reinsurance contract. In the case of contractual reinsurance transactions, the transferring company transfers all the risks of a portfolio of activities to the reinsurer. For example, a major insurer could transfer its entire book from the commercial car or all of its owners` risk. Both parties will enter into an agreement known as a contract in which the reinsurer is required to accept all covered transactions. In the case of optional reinsurance operations, the transferring company may offer an individual risk or a set of defined risks to a reinsurer. The reinsurer reserves the right to accept or refuse the risk, just as the main insurer has the right to decide whether or not to insure a policyholder […].

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