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Chapter 4 Features and operation of proportional reinsurance treaties 4/7

Surplus treaties are usually a specified multiple of that gross retention, resulting in surplus capacity
being described as ‘x lines of y maximum gross retention’. For example, a ten-line first surplus treaty
subject to a maximum cession of £5m on any one risk. One line is a maximum of £500,000, thereby
giving the insurer a maximum gross capacity of £5.5m on the best risks (i.e. retention £0.5m plus
cession to surplus of £5m).
There are also cases where surplus capacity is constructed on the insurer’s net retention, or gross
retention after quota share cession, but we shall concentrate on surplus capacity geared to a gross
retention. If the reinsurance treaty were a ten-line surplus treaty, the maximum coverage under the
reinsurance would be as follows:

Table 4.3: Maximum coverage under the treaty
Retention Ten-line surplus limit
Factories £150,000 £1,500,000
Warehouses £200,000 £2,000,000
Retail outlets £350,000 £3,500,000 Chapter
Offices £500,000 £5,000,000 4

Miscellaneous £400,000 £4,000,000

Be aware
Further lines could be added beyond the ‘first’ surplus treaty to become a ‘second’ surplus.

A2A Operation of surplus treaties
The mechanics of ceding a risk under a surplus treaty do not differ from those of an individual facultative
proportional cession. However, there are substantial differences in the creation of any surplus treaty.
Example 4.6 Reference copy for CII Face to Face Training
Let us assume a four-line surplus treaty, giving the insurer an automatic underwriting capacity of £5m (£1m own
gross retention plus £4m, comprising four surplus lines each of £1m).
The insurer has accepted five risks, all of first-class construction. If the insurer decided to retain its maximum gross
retention then the risks would be apportioned to the surplus treaty as follows:

Table 4.4: Risks apportioned to treaty
Risk Original sum insured Company retains Cedes to surplus %
1 1,000,000 1,000,000 (100%) Nil
2 2,500,000 1,000,000 (40%) 1,500,000 (60%)
3 3,200,000 1,000,000 (31.25%) 2,200,000 (68.75%)

4 4,000,000 1,000,000 (25%) 3,000,000 (75%)
5 5,000,000 1,000,000 (20%) 4,000,000 (80%)