Proportional treaties
Reinsurance Management provides two types of proportional treaties:
- Quota share – The reinsurer assumes an agreed-upon percentage of each relevant risk and shares all premiums and losses accordingly with the reinsured. For example, an insurer has a 40% quota share on all homeowners policies. For every policy, 40% of the premium is ceded to the reinsurer. The reinsurer is responsible to pay for 40% of all losses. A quota share treaty provides reinsurance coverage starting at $0 up to a coverage limit.
- Surplus – The surplus treaty provides reinsurance coverage from a starting value up to the coverage limit. The way in which the percentage of premium is ceded and losses are paid is similar to quota share.
Example of ceding risk to proportional treaties
In a reinsurance program, quota share and surplus treaties provide layers of reinsurance coverage. In the following example, three proportional treaties provide reinsurance coverage up to $10 million:
Treaty |
Layers of reinsurance |
Monetary risk ceded to reinsurer |
Proportional share of risk |
|---|---|---|---|
Surplus 2 |
From $5 million to $10 million |
$5 million |
$5 million of $10 million = 50% |
Surplus 1 |
From $1 million to $5 million |
$4 million |
$4 million of $10 million = 40% |
Quota share |
From $0 to $1 million ceding 40% of the risk to the reinsurer |
$400,000 |
$400,000 of $10 million = 4% |
Insurer’s share |
From $0 to $1 million 60% of the risk retained by the insurer |
$600,000 |
$600,000 of $10 million = 6% |
The treaties share a $10 million risk proportionally as shown in the following illustration:
When there is a loss of $10 million or less on a risk with a total insured value of $10 million, the proportional treaties share the loss proportionally. The amount of each treaty’s share is shown in the last two columns of the following table:
Treaty |
Proportional share of loss |
$10 million loss |
$5 million loss |
|---|---|---|---|
Surplus 2 |
50% of loss amount |
$5 million |
$2.5 million |
Surplus 1 |
40% of loss amount |
$4 million |
$2 million |
Quota share |
4% of loss amount |
$400,000 |
$200,000 |
Insurer’s share |
6% of loss amount |
$600,000 |
$300,000 |
When there is a loss of $2 million on a risk with total insured value of $3.7 million, Surplus Treaty 2 does not apply. This treaty does not apply because the risk does not exceed $5 million. Only the Quota Share Treaty and Surplus Treaty 1 apply. The proportional treaties share the loss proportionally as shown in the last two columns of the following table:
Treaty |
$4 million risk proportional share calculation formula |
Proportional share of loss |
Actual monies tendered on the $2 million loss |
|---|---|---|---|
Surplus 2 |
N/A since the total risk < $5 million |
0% |
$0.00 |
Surplus 1 |
100% x 2.7 million/3.7 million |
73% |
$1.46 million |
Quota share |
(40% x $1 million)/3.7 million |
11% |
$220,000 |
Insurer’s share |
(60% x $1 million)/3.7 million |
16% |
$320,000 |