Basics of Reinsurance Capsule - 3

What is Proportional Treaty And Its Types->

A proportional reinsurance agreement, also known as “Pro Rata” reinsurance,?obligates the reinsurer to share a percentage of the losses. The reinsurer receives a prorated share of the insurer’s premiums.

Under?proportional reinsurance coverage, the insurer and the reinsurer both share the premiums and the claims on a given risk in a specified proportion. In Proportional reinsurance the part of original insurance premiums and losses are being shared between a reinsurer and insurer.

Different Types of Proportional Treaty- Essentially, there are two types of?pro rata reinsurance:?quota share and surplus share.

What is Quota Share?

A quota?share treaty is?a?pro-rata?reinsurance?contract in which the insurer and reinsurer share premiums and losses according to a fixed percentage. Quota share reinsurance allows an insurer to retain some risk and premium while sharing the rest with an insurer up to a predetermined maximum coverage.

Consider an insurance company looking to reduce its exposure to the liabilities created through its underwriting activities. It enters into a quota share reinsurance contract. The contract has the insurance company?retaining 40% of its premiums, losses, and coverage limits, but cedes the remaining 60%?to a reinsurer. This?treaty would be called a 60% quota share treaty because the reinsurer is taking on that percentage of the insurer's liabilities.

What Is Surplus Treaty?

In a surplus share treaty, the ceding insurer retains liabilities up to a specific amount, called a line, with any remaining liability being ceded to the reinsurer. The reinsurer, thus, does not participate in?all risk?and instead participates in?only the risks above what the insurer has retained, making this type of reinsurance different from?quota share reinsurance. The total amount of risk that a?reinsurance treaty covers, called the capacity, is typically expressed in terms of a multiple of the insurer’s lines.