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4/2 M97/February 2018 Reinsurance

Introduction

Non-proportional A reinsurance treaty is a method of reinsurance whereby the insurer and reinsurer enter into an
treaties will be
examined in agreement for the former to cede and the latter to accept all insurances offered within the limits of the
chapter 5 treaty. This means that automatic acceptance is secured and there is an obligation for the reinsurer to
accept all risks within the scope of the treaty. The insurer can, therefore, grant cover immediately for any
proposal accepted within the limits of the treaty. In this chapter we look at the characteristics of
proportional treaties and the ways in which they operate.

Key terms
This chapter features explanations of the following terms and concepts:
Capacity Cession limit Claims reserve Clean cut accounting
Commission Event limit Exposure Facultative carve-out
Loss participation Net retention Portfolio transfer Premium reserve
4 Proportional reinsurance Quota share treaty Sliding scale Surplus treaty
Chapter treaty

Underwriting year
accounting

A Main features and operation of proportional
reinsurance treaties

There are two main types of proportional reinsurance treaty. The first results in sharing all risks between
Two main types of
proportional the insurer and the reinsurers and is known as a quota share treaty. The second enables the insurer to
reinsurance treaty retain the smaller risks while sharing proportionately the larger risks and is known as a surplus treaty.
We will also make some reference to facultative obligatory treaties in this chapter. Reference copy for CII Face to Face Training
Reinforce
Make sure you are clear on this key difference between a quota share treaty and a surplus treaty.

A1 Quota share treaties

A quota share is an obligatory treaty where the insurer has to cede a fixed percentage of all its risks
within agreed parameters. The reinsurer is then obliged to accept all the cessions made, usually subject
to a maximum amount in any one cession.

A1A Operation of quota share treaties
Let us start by looking at an example.

Example 4.1
The insurer retains 40% of all business written for its own account under its taxicab account. The insurer reinsures
with the reinsurer, who agrees to accept a 60% share of all business written under the insurer’s taxicab account. The
reinsurer agrees that the insurer should have the benefit of a 12% ceding commission to cover the costs of acquiring
and managing the original business.

Table 4.1: Quota share treaty

Name of risk Amount of premium Reinsurer’s share Ceding commission Insurer’s share †
*
(net premium )
Dodgy Cabs £1,000,000 £528,000 £72,000 £472,000
Ace Minicabs £500,000 £264,000 £36,000 £236,000
Pick-em-up £2,500,000 £1,320,000 £180,000 £1,180,000
Pubshut Cabs £1,500,000 £792,000 £108,000 £708,000
†
* net premium = gross premium ceded less ceding commission. retained net premium plus ceding commission.