What is Continuous Contract
A continuous contract is a reinsurance contract that does not have a fixed contract end date, and which will continue to be renewed and be in effect until one of the parties in the contract terminates it. Continuous contracts are different from standard reinsurance contracts in that they do not provide coverage for only a fixed period of time.
BREAKING DOWN Continuous Contract
When entering into a reinsurance contract, the parties involved may decide that they want a continuous contract in order to renew the policy indefinitely. The contract language will define the risks covered and will also indicate the procedures that either party can follow in order to provide a notice of termination. The notice could be a written notice provided one month before the contract is set to renew, or may follow whatever notice period to which both parties agree. The validity portion of the insurance contract may say, for example, that the contract is considered continuous unless both parties indicate that it is not to be considered as such.
Notice of termination must be given within the time set forth in the termination clause or the contract will continue for another term. Both reinsureds and reinsurers are often in a quandary over whether to provide notice of termination or to allow the contract to continue. For such cases, a practice has developed whereby one or both parties will send a provisional notice of cancellation (often called a "PNOC"). The provisional notice gives the parties a chance to assess the relationship, receive the annual update information for the treaty, and then decide whether they should continue the contract. If the decision is made to continue, the PNOC is withdrawn and the contract continues without interruption beyond the anniversary date.
Early Termination of Continuous Contracts
While a continuous contract may be renewed for an indefinite period of time, it will only remain in force for a specified contract period at any time. This means that both parties have the ability to end the contract while not breaking the terms of the agreement by ending the contract while it is still active. This type of contract is a fixed period contract, with a provision allowing for periodic renewal.
If the insurance contract is terminated earlier than what the two parties agreed, the insurer will still receive the premium that it is entitled to for the period of time that it has provided coverage. In most cases, the amount of premium earned is dependent on the amount of time for which the coverage has been provided, though in some cases, the two parties may have agreed to an alternative schedule not based on time.