Proportional Reinsurance: Quota Share and Surplus
IC-81 tests the two proportional methods in detail. In proportional reinsurance, premium, losses and expenses are shared by the same percentage because the reinsurer accepts a fixed share of the risk.
Quota share
- The cedant cedes a fixed percentage of every policy within the treaty scope.
- The reinsurer receives the same percentage of premium and pays the same percentage of losses.
- Quota share commission reimburses the cedant for acquisition and administration costs.
- A quota share shares small and large risks alike, so it is simple but can cede desirable business.
Surplus
- The cedant fixes a retention and buys a number of lines; each line normally equals the retention.
- Cession percentage = (sum insured - retention) / sum insured, capped by the treaty capacity.
- Surplus is selective: smaller risks may be retained in full, while large risks are ceded.
Worked example
Retention is INR 10 lakh and the insurer buys four surplus lines, giving capacity of INR 40 lakh. For a INR 30 lakh policy, ceded amount = INR 20 lakh and retention = INR 10 lakh, so the cession is 66.67%. If the annual premium is INR 6 lakh, ceded premium is INR 4 lakh. A INR 3 lakh loss gives the reinsurer INR 2 lakh. For a INR 60 lakh policy, the treaty can cede only INR 40 lakh; the cedant retains INR 20 lakh unless facultative cover is bought.
Traps
Do not apply the retention as a percentage in a surplus treaty; it is a monetary first-loss retention. Do not ignore treaty capacity. Do not calculate commission on gross premium instead of ceded premium.