The transferring company would prefer an excess loss agreement for the $1,000,000 claim, as it would pay 7.5% of the claim instead of the 25% it would pay in co-payment. For the $100,000 claim, it would prefer a co-payment, as it would pay 25 per cent of the total claim instead of the 75 per cent under the excess loss option. There are two types of reinsurance: loss overrun and co-payment. Deductible reinsurance is not considered proportional because the amount of the claim paid by the reinsurer and the transferring company depends on the severity of the claim. Quota reinsurance is considered proportionate, with the transferring company and the reinsurer covering the same amount of loss, regardless of their severity. A company that chooses between these two types of coverage should weigh the likelihood of a high-severity claim, as high-severity claims are more likely to make exceeding loss coverage more economical. In order to free up capacity, the insurer may transfer part of its liabilities to a reinsurer via a reinsurance contract. In return for taking over an insurer`s liabilities, the reinsurer receives a portion of the policy premiums. Financial quota actions do not require the transferor to pay a deductible before coverage begins, as the company is still responsible for part of the loss. Businesses, including insurers, often treat reinsurance as a form of capital. Indeed, a reinsurance contract allows a transferor to transfer part of his risk from his balance sheet to that of the reinsurer, thus reducing the capital he must use in the event of a claim. Imagine an insurance company that wants to reduce its exposure to liabilities arising from its underwriting activities.
It concludes a quota reinsurance contract. The contract states that the insurance company retains 40% of its premiums, losses and coverage limits, but the remaining 60% is paid to a reinsurer. This contract would be called a 60% share contract because the reinsurer assumes that percentage of the insurer`s liabilities. A share share contract is a pro-rated reinsurance contract in which insurers and reinsurers share premiums and losses on a fixed percentage. .