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Chapter 7 Contract wordings 7/19

C Clauses used in proportional wordings

C1 Cession clause

The cession clause sets out the nature and the main terms of the proportional reinsurance. It is also
known as the ‘reinsurance clause’ or the ‘treaty detail’.
The first part of the clause confirms the obligatory nature of the contract, that is, the reinsured agrees to
cede and the reinsurer to accept the amount of the cession – the proportion ceded to reinsurance.
A quota share treaty will identify the fixed proportion or percentage of the applicable business for the
account of each party, whereas a surplus treaty will identify the number of lines and the minimum
retention of the reinsured. Here, the parties will also agree that the reinsurer shall be subject to the
same terms, warranties, clauses and all other conditions as may be contained in the original policies
protected under the reinsurance but, subject, nevertheless to the terms and conditions of the
reinsurance. This is, typically, followed by a statement of the overarching intention of the agreement,
namely that ‘Reinsurers shall follow the fortunes of the Reinsured in all things coming within the scope
of this Agreement’. This statement is considered fundamental to the operation of proportional
reinsurances, reflecting the true sharing of risks, premiums, commissions, expenses and losses between
the parties.
Further, it is usually agreed that the reinsurer’s liability commences simultaneously with that of the
reinsured which, in practice, corresponds to when the reinsured accepts the original risk under a quota
share treaty, or as soon as the retention is exceeded on a surplus treaty.
Cession limit
The agreement to accept a fixed proportion of the business falling within the terms and conditions of the
Agreement to accept
reinsurance will be subject to a cession limit. A cession limit is a maximum monetary amount that may a fixed proportion of
be ceded to the treaty in respect of each risk, interest, policy or whatever basis the parties have agreed the business
that the limit will apply.
Cession retention
As described above, the reinsured agrees to retain an amount for its own account. The clause may allow Reference copy for CII Face to Face Training
that amount to be protected by other reinsurance or it may not. Typically, the reinsured will be required
to retain that amount net and unreinsured, subject only to the benefit of excess of loss catastrophe
reinsurance. Chapter

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