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It is an independent contract between the reinsurer and the primary insurer, and the original insured (A) is not a part of the contract. If the claimant is an individual or even a group of individuals, an insurance company will find it relatively easy to
cover the claims. But if there are a huge number of claims at the same time and the loss is massive and widespread, this may not be possible.

A reinsurer enters into a reinsurance agreement for a very specific reason - either the nature of risk insured, or the business strategies of the insurers, or other possible reasons. Reinsurance is an important criterion to determine the success of insurance business. Reinsurance mainly covers catastrophic risks that are not predictable and cause the greatest exposure for the insurance companies. The September 11 attack was a similar situation. A single insurer will not be able to bear such damaging financial impact so the unbearable loss is broken down into bearable units by risk transfer. The amount of risk a company limits depends upon the contract terms as well as factors like worth of assets, trends of inflation in the economy, the price of the insurance products, and the type of risk.

Principles of Reinsurance

Reinsurance contract basically depends upon three principles: -