In automatic or treaty reinsurance the direct writer as well as the reinsurer get into an authority contract this agreement the first kind will cede an agreed amount auto insurance texas for the latter. The amount of risk which the reinsurer must accept on each insured is dependent upon the treaty. These treaties would not have a termination period and continue before agreement is cancelled by one of many parties.
There are three basic types of automatic or treaty reinsurance. The first is quota share in which the reinsurer agrees to just accept a specific portion of the gross writings of the ceding company. In this arrangement the reinsurer assumes some of all risks written by the ceding company and get compensated to pay expenses and produce money. The reinsurer indemnifies the ceding company against a fixed area of loss on each risk covered inside the contract .
A second form of treaty is called surplus share. It is different from quota share in that instead of ceding a percentage of gross premiums, the reinsured establishes a professional rata retention or “line” on the individual risk and then cedes a portion or multiple of the line.
The next kind of automatic or treaty reinsurance is named excess of loss. These treaties generally offer the reinsured to bear all loss as much as the retention decided. Here the reinsurer only assumes risks exceeding the retention limit. Under the quota basis, the reinsurer assumes a part of every risk insured; whilst in excess treaties the reinsurer only assumes that part of a loss above the retention limit.
If the cedant’s net retention is $100,000 and also the excess coverage is for $200,000, the agreement would be expressed as $200,000 overabundance $100,000. For instance, a $200,000 loss has experience. The cedent would pay $100,000 and the reinsurer would spend the money for remaining $100,000. On the other hand, if a $225,000 loss occurs, the cedant would pay $100,000. The reinsurer would pay $100,000, and also the remaining $25,000 of loss reverts to the cedant. Read more here.
Pre-arranged excess reinsurance agreements have several functions in accordance: (1) they protect the cedant against large losses which arise from policies issued; (2) they encourage the cedant to limit its amount of maximum probable loss with a predetermined level which may be safely absorbed from the cedent’s financial structure and premium volume; (3) they stabilize the cedant’s loss ratio by allowing heavy losses to be spread over a period of years.