How proportional reinsurance works
In proportional (pro rata) reinsurance the reinsurer takes a fixed share of each risk and receives the same share of the original premium. If the reinsurer has 40% of a policy, it pays 40% of every loss on that policy, large or small. Because the reinsurer also takes on its share of acquisition costs, it pays the cedent a ceding commission. Proportional cover can be arranged as a treaty or, for single risks, on a facultative basis.
Quota share
A quota share cedes the same percentage of every policy in a portfolio. It is simple to administer and gives broad capital relief, which makes it popular with start-up insurers, companies entering new lines, and insurers growing faster than their capital. Its drawback is that the cedent also gives away a share of its best, smallest risks.
Surplus
A surplus treaty lets the insurer keep risks up to its retention (one "line") and cede only the excess, up to a set number of lines. Small risks stay fully retained; large ones are shared. Surplus treaties are common in property business in Europe and Asia because they balance the portfolio by sum insured. They require careful line-setting and more detailed administration than quota share.
Commissions and profit sharing
- Flat ceding commission: a fixed percentage of ceded premium.
- Sliding scale: the commission rises when the loss ratio falls and falls when losses rise, within a range.
- Profit commission: the cedent receives part of the reinsurer's profit after expenses and losses.
- Loss participation or corridor: the cedent retains part of losses in a set loss-ratio band, aligning interests.
Limits that protect the reinsurer
Pure pro rata cover would expose the reinsurer fully to catastrophes, so treaties often include an event limit (a cap on the reinsurer's share of any one catastrophe) and a loss ratio cap. Cedents then protect their retained share with excess of loss cover. Read the interaction between these layers carefully.
Advantages and limitations
| Advantages | Limitations |
|---|---|
| Simple, predictable sharing of results | Profitable business is ceded too |
| Ceding commission funds acquisition costs | Limited protection against a single catastrophe |
| Strong capital and surplus relief | Detailed bordereaux reporting required |
International use
In the US, quota shares are widely used by managing general agents' carrier partners, fronting carriers and growing insurers to support statutory surplus. European and Asian markets have a long tradition of surplus and quota share treaties for property and engineering. Bermuda reinsurers and third-party capital vehicles write quota shares, including on casualty books, and Lloyd's syndicates themselves buy quota share cover, sometimes from capital providers through special purpose arrangements.
Portfolio entry and withdrawal
When a proportional treaty starts or ends, the parties agree how in-force business is handled. A portfolio entry transfers unearned premium and outstanding losses into the new treaty, while a clean cut ends the reinsurer's liability at expiry with a matching portfolio withdrawal. The alternative, a run-off basis, leaves the reinsurer responsible for policies ceded during its period until they expire and their claims are settled.
Getting started
Prepare at least several years of premium and loss data, your underwriting guidelines and a risk profile by sum insured. Polis Re helps structure the request and connects you with licensed reinsurance intermediaries and authorized reinsurers. Send a request.