For example, consider a non-life insurance company that accepts policies with $500,000 insurance coverage and wants to keep $100,000 in debt as your course of action. The remaining $400,000 will be transferred to the reinsurer. The $400,000 represents the amount covered by the surplus unit contract. This type of reinsurance is often used for liability insurance and disaster damage. A reinsurance contract is only an agreement between two or more insurance companies whererly one (direct insurer) accepts termination and the other (reinsurer) accepts the acceptance of the reinsurance activity in accordance with the terms of the contract. With respect to reinsurance, the insurer can issue policies with higher limits than would normally be allowed, and thus take more risks, since some of that risk is now transferred to the reinsurer. A basis on which reinsurance is provided for the rights arising from the policies that are used during the period to which the reinsurance relates. The insurer knows that there is coverage throughout the insurance period, even if claims are not discovered or claimed until later. Sometimes insurance companies want to offer insurance in legal systems where they are not licensed or in which they feel that the local rules are too heavy: for example, an insurer may offer an insurance program to a multinational to cover risks in kind and liability in many countries of the world. In such cases, the insurance company may find a licensed local insurance company in the country concerned, induce the local insurer to pay an insurance policy covering the risks in that country and enter into a reinsurance contract with the local insurer in order to transfer the risks to itself.
In the event of a loss, the policyholder would claim rights against the local insurer under the local insurance policy, the local insurer would pay the debt and demand a refund under the reinsurance contract. Such an arrangement is called “fronting.” The frontage is sometimes used even when an insurance buyer requires a certain financial rating from his insurers and the potential insurer does not meet this requirement: the potential insurer may eventually convince another insurer with the required solvency to grant coverage to the purchaser of insurance and to take out a reinsurance with respect to the risk. An insurer that acts as a “front insurer” receives a wholesale fee for this benefit to cover the reinsurer`s management and possible failure. The front insurer takes a risk in such transactions because it is required to pay its insurance fees even if the reinsurer becomes insolvent and does not reimburse the fees.