Direct insurers and reinsurers negotiate reinsurance contracts (insurance for the insurance company) using discretionary agreements and/or contractual contracts; in general, they are used in combination. Each of these agreements serves a specific purpose: optional reinsurance contracts are much more targeted. They cover underlying strategies and are written on a specific political basis. An optional agreement covers a specific risk from the insurer that has withdrawn. A reinsurer and an resigning insurer must agree on the terms of each contract. Optional reinsurance contracts often cover catastrophic or unusual exposures. Optional reinsurance is coverage purchased by a general insurer to cover a single risk – or a block of risk – held in the general insurer`s business account. Optional reinsurance is one of two types of reinsurance (the other type of reinsurance is called contractual reinsurance). Optional reinsurance is considered a single transaction agreement, while contractual reinsurance is generally part of a long-term hedging agreement between two parties. While contractual reinsurance does not require an individual risk check by the reinsurer, it does require careful verification of the philosophy, practice and historical experience of the insurer that arises. Contractual and discretionary reinsurance contracts may be written on a proportional or surplus basis (or a combination of both). Optional reinsurance allows the reinsurance company to verify individual risks and decide whether to accept or reject them. The profitability of a reinsurance company depends on the intelligence with which it chooses its customers.
In an optional reinsurance agreement, the receiving company and the reinsurer establish an optional certificate indicating that the reinsurer accepts a particular risk. So before even agreeing to cancel the policy, the insurer must look for an optional reinsurance and try the market until it gets the remaining $10 million. The insurer could receive $10 million from 10 different reinsurers. But without it, it cannot agree to adopt this policy. Once he has the agreement of the companies to cover the $10 million and is confident that he can possibly cover the total amount, if there is a claim, he can enact the policy. An insurance company that enters into a reinsurance contract with a reinsurance company, also known as a business at the end, does so to deduct part of its risk for a fee.