Example: ceded premiums in Reinsurance Management

This example shows how PolicyCenter cedes premiums to several proportional agreements and to the facultative excess of loss agreement above the proportional agreements.

The following example is for a building with a $15 million TIV.

The reinsurance program attached to this building contains the following agreements:

Agreement	Layers of reinsurance	Amount of risk ceded	Proportional share of risk
Facultative excess of loss	$10 million to $15 million	$5 million	Not applicable
Proportional Treaties
Surplus treaty 2	$5 million to $10 million	$5 million	$5 million of $10 million = 50%
Surplus treaty 1	$1 million to $5 million	$4 million	$4 million of $10 million = 40%
Quota share treaty	$0 to $1 million ceding 50% of the risk to the reinsurer	$500,000	$500,000 of $10 million = 5%
Insurer’s share	$0 to $1 million, insurer retaining 50% of the risk	$500,000	$500,000 of $10 million = 5%

The program provides reinsurance coverage as shown in the following illustration.

The Facultative Excess of Loss agreement takes $5 million of this risk, so the modified TIV is $10 million.

The total written premium is $11,250. The ceded premium for the Facultative Excess of Loss agreement is a flat amount of $1000 with a 25% markup ($250). Therefore, the gross net premium (GNP) is $10,000.

The pie chart shows the proportional share of risk for each proportional treaty.

The ceded premium for the quota share treaty is calculated as follows:

1. Calculate the proportional share of risk:

   Proportional Share of Risk = Amount of Risk in Layer / Modified TIV
   10% = $1 million / $10 million

2. Calculate the proportional ceded premium:

   Prop Ceded Premium = GNP * Percentage of Premium
   $500 = $10,000 * 5%

The premium ceded to the proportional treaties are:

Proportional treaty	Proportional share of risk	Proportional ceded premium
Surplus treaty 2	50%	$5,000
Surplus treaty 1	40%	$4,000
Quota share treaty	5%	$500