Proportional Reinsurance by Alin-Iustinian Toderita
Common principle
In Proportional Reinsurance, there is a direct connection between the portfolio written and the portion of that portfolio ceded to reinsurers.
The Reinsurer assumes a certain proportion of the risk in exchange of same portion of the premium paid by the insured and will pay the same proportion of the loss if there is one.
The arrangement may be “quota-share” or “surplus reinsurance” (also known as surplus of line or variable quota share treaty) or a combination of the two.
Quota-share Reinsurance
The term Quota comes from Latin and means Part of Total.
The allocation of risk between the insurer and its reinsurer makes it possible to retain the Same Percentage of each risk.
Advantages
- protection of a high frequency of small to medium losses
- increase of the insurance capacity
- easy to apply and administrate
- no selection opportunity for the reinsurer
- the Reinsurer follows the fortune of the Insurer
- Improvement of the Insurer’s solvency margin
Disadvantages
- transfer of considerable amount of premium of Reinsurance
- after reinsurance the portfolio remains heterogeneous
- not well protected against large losses, no smoothing of results over time
Surplus reinsurance
The insurer cedes to the reinsurer that proportion of each risk by which the sum insured exceeds a fixed monetary amount (retention).
The Reinsurer shares, in that same proportion all premiums and losses for the risk in question and the monetary retention is the same for all risks.
Maximum capacity of the reinsurance treaty is equal with fixed number of lines (1 line=retention).
Advantages
- homogenization of portfolio
- tight control over retention
- limited draining of premium
- partnership with reinsurer
Disadvantages
- the result is not shared equally with the reinsurer (unbalanced capacity for the reinsurer)
- higher administration work (the portfolio is ceded risk by risk)
- no protection against loss accumulation
