Proportional reinsurance
Proportional reinsurance is a pro rata arrangement in which the ceding insurer and the reinsurer share premiums and losses in a set proportion. It includes quota share and surplus share treaties.
Under proportional reinsurance, the reinsurer takes an agreed share of the covered book. As the Insurance Information Institute explains, the reinsurer and the primary company share both the premium from the policyholder and the potential losses. In a quota share treaty the same percentage applies to every risk, while in a surplus share treaty the split varies with the size of each policy.
This differs from non-proportional, or excess of loss, reinsurance, where the reinsurer pays only the part of a loss above an agreed retention. Proportional deals give the cedent capacity and surplus relief from the first dollar of loss, and the reinsurer typically pays a ceding commission to help cover the cedent's acquisition and administration costs.
For example, under a 40 percent quota share treaty, the reinsurer receives 40 percent of the premiums and pays 40 percent of the losses on the covered policies.
Definitions are educational and general, and specific contracts, endorsements, and state rules may modify them. For regulatory guidance, refer to the NAIC or the Insurance Information Institute.