The essence of proportional reinsurance

In proportional reinsurance the insurer and the reinsurer share the risk in an agreed proportion: in the same proportion in which the sum insured is ceded, the reinsurer receives the premium and pays each loss. If the cedent has ceded a certain share of liability on a risk, the reinsurer reimburses the same share of any loss — small or large. In return the reinsurer pays the cedent a reinsurance commission, which compensates the costs of sourcing and servicing the business. This form is used both in treaty programs and in facultative placement of individual risks.

Main types

Quota share treaty

The cedent cedes a fixed share of all the portfolio's risks falling under the contract. The share is the same for each policy regardless of the sum insured, within the overall limit per risk. A quota share is simple to administer, quickly relieves capital and suits new companies, new classes of insurance or portfolios with insufficient statistics. The drawback is that a share is also ceded of risks that the insurer could have retained itself.

Surplus

The cedent determines its own retention per risk — one "line". The reinsurer accepts part of the sum insured above the retention, usually up to several lines. The ceded share is calculated for each risk separately: small policies stay with the insurer in full, and large ones are ceded for the most part. A surplus treaty allows the portfolio to be evened out by size of sum insured, but requires more complex accounting.

Quota share and surplus combined

A combination: a quota share applies to the retention, and a surplus above it. It is used when it is necessary both to relieve capital and to increase capacity on large risks.

When it is used

  • capacity needs to be increased to accept risks with large sums insured;
  • the burden on capital needs to be reduced and solvency standards met;
  • the insurer is developing a new class of insurance and wants to share the result with a partner;
  • financing through reinsurance commission is needed during a period of portfolio growth.

Advantages and limitations

Proportional reinsurance is clear to both sides: the interests of the cedent and the reinsurer coincide, since they share both profit and losses. It smooths the financial result, widens underwriting capabilities and gives access to the partner's expertise. At the same time the cedent gives up a notable part of the premium, including on profitable risks, and the form itself gives little protection against accumulation of losses from a single event — for that it is supplemented with non-proportional treaties.

Key terms

  • the size of the quota or the retention and the number of surplus lines;
  • the limit per risk and, where necessary, the limit per event;
  • reinsurance commission — fixed or sliding scale, depending on the actual loss ratio;
  • profit commission and the method of calculating it;
  • the procedure for transferring the premium and loss portfolio on entering and leaving the treaty;
  • bordereaux, frequency of accounts, payment of large losses by cash calls before the end of the period;
  • exclusions and scope of the treaty.

What data is needed for a quotation

  • the risks and size of the portfolio, distribution by sums insured and classes of insurance;
  • the desired participation shares and the retention;
  • the terms of distributing liability and the limits per risk;
  • the existing terms of the program, if it is already in force, and premium and loss statistics.

How Polis Re helps

The Polis Re broker helps choose between a quota share, a surplus or a combination of them, models the effect of the structure on retention and result, prepares materials for the market, agrees commission and terms with reinsurers on the domestic and international market, and supports settlements under the treaty. Terms can be checked in the glossary. To discuss a program, send a reinsurance request.