Reinsurance and Risk Transfer
Why reinsurance exists
Reinsurers supply capacity, surplus relief, catastrophe protection, and underwriting expertise, and they stabilize results by smoothing large or volatile losses. The ceding company retains a retention and transfers the excess. Treaties cover a class or book automatically; facultative covers individual risks and is negotiated case by case.
Proportional versus non-proportional
Proportional treaties share premium and losses in a fixed ratio. Quota share cedes a constant percentage; surplus share cedes amounts above a line and scales with the size of the risk. Non-proportional treaties respond only above an attachment point. Per-risk excess of loss covers a single loss; per-occurrence catastrophe excess of loss covers an event; aggregate stop loss protects the whole year. A frequent trap is confusing a surplus share's variable cession with quota share's fixed percentage, or applying a cat layer per risk.
Key mechanics
Reinstatements restore limit after a loss, often for additional premium. Ceding commissions compensate the cedent for expenses in proportional treaties. Experience accounts, profit commissions, and sliding scales align interests. Fronting arrangements and finite or structured reinsurance raise regulatory scrutiny because risk transfer may be insufficient to qualify for reinsurance accounting. Credit for reinsurance depends on collateral or authorized status of the reinsurer.
Worked example
A 75% quota share on $1,000,000 of premium: cedent keeps $250,000 and cedes $750,000; a $400,000 loss is shared 75/25. Rule of thumb: proportional shares everything by ratio; non-proportional shares nothing until the loss pierces the attachment point, then only the excess.