surplus share reinsurance

Quota share treats every policy with the same percentage, even the tiny ones the insurer could easily handle alone. Surplus share is a smarter, more selective cousin: it leaves small policies entirely with the cedant and only kicks in to share the larger ones. Picture a company perfectly happy to keep any single house worth up to 500,000 on its own books, but uncomfortable with the rare mansion worth 5 million. Surplus share lets it keep the small ones whole and cede only the dangerous excess on the big ones.

The mechanics rest on the cedant's chosen retention, called a line. Say the line is 500,000. Any policy at or below 500,000 is kept entirely by the cedant — zero ceded. Above that, the reinsurer takes the excess, up to a treaty limit expressed as a number of lines (a 'nine-line' treaty covers up to 9 times 500,000, or 4.5 million above the retention). For a 5 million building, the cedant keeps its 500,000 line and cedes 4.5 million, so the cession is 90 percent — and premiums and claims on that policy are then split 10/90 in that proportion. Crucially, the proportion is different for every policy, set by how far each one exceeds the line.

Surplus share gives an insurer the homogenizing power of reinsurance exactly where it needs it: it shaves down only the oversized risks, leaving the net retained book full of similarly sized, well-behaved policies that the law of large numbers can tame. It is more administratively fiddly than quota share because the ceded proportion must be computed policy by policy, and it gives away nothing on the small business the insurer was content to keep. A common point of confusion: surplus share is still proportional reinsurance — premiums and losses on each policy share the same ratio — even though that ratio is not constant across the book the way quota share's is.