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A surplus share reinsurance agreement is characterized by the way it manages losses and retention limits between the primary insurer and the reinsurer. In this type of agreement, the primary insurer retains losses up to a predetermined limit, which means that any losses above this threshold are transferred to the reinsurer.

This structure allows the primary insurer to manage risk effectively by retaining manageable loss amounts and passing on larger, less predictable losses to the reinsurer. It is designed to handle excess or surplus risks, hence the term "surplus share." By mandating the retention of losses above a specific limit, the agreement ensures that the primary insurer has a vested interest in loss prevention and management up to that threshold, while also providing a safety net for larger and potentially catastrophic losses that could threaten the financial stability of the insurer.

The other options do not accurately describe the nature of surplus share reinsurance. For instance, stating that the reinsurer assumes all losses is misleading because the primary insurer retains a portion of the risk, which is central to this agreement's design. Similarly, the agreement does not cover all classes of loss without restrictions, as there are typically specific terms and conditions governing the lines of business and types of risks covered. Lastly, the incorrect alternative regarding retaining losses below