The principle of proportional reinsurance

In proportional reinsurance, the insurer and the reinsurer share the risk in a pre-agreed proportion. The reinsurer receives the corresponding share of the original premium and pays the same share of every loss, small or large. In return it pays the cedent a reinsurance commission that offsets the cost of acquiring the business: intermediary fees, underwriting and administration.

Both a facultative cession of a single risk and a treaty cession of a portfolio can be proportional.

Quota share

Under a quota share treaty, the reinsurer accepts a fixed percentage of every risk in the portfolio. For example, with a 40% quota it receives 40% of the premium and pays 40% of any loss. A quota share is simple to administer, suits new insurers and new lines, and noticeably reduces the capital burden. The drawback is that the cedent also cedes small, predictable risks it could have kept.

Surplus

Under a surplus treaty, the cedent retains each risk up to a set amount, a line of retention, and cedes the excess to the reinsurer within a number of lines. The reinsurer's share differs from risk to risk: small risks stay entirely with the insurer, large ones are largely ceded. For example, with a retention of RUB 50 million and a capacity of four lines, on a risk with a sum insured of RUB 150 million the cedent retains one third and cedes two thirds; premium and losses are shared in the same proportion.

Reinsurance commission and profit commission

  • Flat commission: a fixed percentage of the ceded premium.
  • Sliding scale commission: depends on the loss ratio; the better the portfolio result, the higher the commission, and vice versa.
  • Profit commission: the cedent's share in the reinsurer's profit on the treaty at the end of the period.

To cap the reinsurer's share of catastrophe losses, the treaty may include an event limit or a loss corridor within which the cedent bears losses itself.

Portfolio, deposits and accounts

When a reinsurer joins or leaves a treaty, the parties decide what to do with policies in force. There are two approaches: the reinsurer remains liable for risks attaching during the treaty period until their natural expiry, or the unearned premium and loss reserves are transferred to the next reinsurer as a portfolio premium and loss portfolio. The cedent sometimes withholds part of the reinsurer's premium as a premium or loss deposit; this secures performance of obligations and is taken into account in settlements.

Settlements are usually made through quarterly accounts: written premium less commission less paid losses. For large losses there is a cash loss provision, under which the reinsurer pays its share immediately rather than waiting for the scheduled settlement.

Why an insurer uses proportional reinsurance

  • More capacity: the insurer can accept risks with larger sums insured.
  • Lower capital burden and compliance with financial stability requirements.
  • Funding growth: the commission helps cover the cost of acquiring new business.
  • Access to the reinsurer's expertise when developing products and rates.

Practice in Russia

The Bank of Russia sets the rules for recognizing reinsurers' shares in technical reserves and in financial stability ratios, so the structure of proportional treaties is chosen with these requirements and the reinsurer's security in mind. Since 2016 the market has had JSC RNRC, the Russian National Reinsurance Company founded by the Bank of Russia. Insurers must offer it a share of the risks they cede to reinsurance (50% of the ceded obligations as a general rule), and the quota share form is the most natural way to build in that share.

Since 2022, proportional capacity from Western reinsurers for Russian risks has been hard to obtain. It is being replaced by RNRC, Russian reinsurers and companies from countries that have not joined the sanctions. Treaties pay particular attention to the settlement currency, sanctions clauses and whether payments can actually be made.

How Polis Re helps

Polis Re specialists help set the retention level, compare quota share and surplus structures, find reinsurers and reinsurance intermediaries, and agree commission terms. Definitions are in the insurance glossary. To discuss a structure, submit a request.