Calculating ceded premiums in Reinsurance Management

In a reinsurance agreement, the reinsurer takes responsibility for part of the risk that the insurer assumed from the insured. In compensation, the insurer cedes part of the premium to the reinsurer.

Ceded premiums are based on the premiums paid by the insured. For a given risk and set of coverages, one or more reinsurance agreements provides reinsurance coverage. The insurer calculates how much of the direct premium is ceded to each agreement.

Important: In the base configuration, PolicyCenter does not calculate ceded premiums for non-proportional treaties. However, you can add this calculation to the reinsurance ceding plugin. For more information about configuring reinsurance ceding, see Reinsurance ceding plugin implementations.

Premium ceding in a proportional treaty

For proportional treaties, the insurer cedes a share percentage of the premium for the total risk.

Assume a $10-million risk as the basis for the following examples:

  • The insurer retains all risk up to $1 million, and there is a surplus treaty in place from $1 million to $5 million. The surplus treaty is ceded $4 million of the $10 million of risk (40%), and is ceded 40% of the applicable premium.
  • The first million of risk is covered by a 80% quota share treaty (rather than being retained by the insurer). That quota share is ceded 80% of $1 million of the $10 million of risk, 80% of 10%, or 8% of the applicable premium.

The applicable premium is the gross net premium, or GNP. In many cases the GNP is not the total premium for the policy. One common situation is where there is an excess of loss agreement in place that limits the risk exposure of the proportional agreement participants.

When PolicyCenter calculates ceded premiums

PolicyCenter calculates ceded premiums if both of the following are true:

  • The policy has been issued.
  • There is at least one active program that applies to the risks on the policy
Important: In the default configuration, PolicyCenter calculates the ceded premiums and commissions and stores the values in a database table. You can integrate with an accounts payable system that processes the ceded premiums and commissions.

Commissions

In addition to earning ceded premiums, the reinsurer pays the insurer a commission that is a percentage of the ceded premium. All agreement types have a field for commission percentage. If there is no commission, set the percentage to 0. For example, many non-proportional agreements do not pay a commission.

The reinsurer pays a commission for several reasons, including:

  • The reinsurer shares the insurance business without the cost of acquiring the customer. Costs include marketing and sales.
  • The reinsurer does not provide the customer with services such as adjudicating claims and billing.

The insurer pays the reinsurer the ceded premium minus the commission. For accounting purposes, the ceded premium and the commission are kept as separate values.

Multicurrency and ceding

In a multicurrency system, multiple currencies do not affect premium ceding for proportional agreements. An agreement that cedes a fixed amount may require a currency conversion. For more information, see Ceding premium in a multicurrency policy.