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Chapter 4 Features and operation of proportional reinsurance treaties 4/9

Figure 4.3: Allocation of claims under surplus

Company retains
Claim to surplus

Amount £500,000
of claim

£400,000

£300,000

£200,000 Chapter

£100,000 4

£0
1 2 3 4 5
Risk

Once the terms and conditions of a surplus treaty have been finalised, the insurer is obliged to cede all
Insurer is obliged to
risks greater than its chosen retention and falling within the scope of the treaty agreement. The reinsurer cede all risks greater
is obliged to accept all such cessions. Both contracting parties, the insurer and reinsurer, have identified than its chosen
retention
obligations under the treaty and are automatically bound in advance to transact business in the manner Reference copy for CII Face to Face Training
specified, with no freedom of choice available to either party.

Be aware
Unlike individual facultative cessions which have to be specifically agreed between the parties, a cession to a
proportional treaty takes immediate effect.

When this surplus treaty is written by a reinsurance company, it might be expressed in the wording as ‘a
four-line surplus treaty of all business written by the property department, subject to a maximum cession
of £4m and a retention of £1m’. This shows both the insurer and reinsurer that all risks written by the
property department exceeding £1m are automatically ceded to the surplus treaty up to the limit (£4 m).
Any amount of risk exceeding £5m in total would have to be reinsured elsewhere or retained by the
insurer.
A2B Second, third and fourth surplus treaties

In addition to a first surplus treaty, there may be second, third, fourth or more surplus treaties rising in
ascending order. The fundamental point to remember is that a risk must be ceded through each treaty in
turn; namely that the capacity of the first surplus must be exhausted in priority to the second surplus,
then the second surplus in priority to the third surplus and so on.