Risk Management in Banking and Insurance · Structure and Type of Re-insurance

Proportional (Pro-rata) Reinsurance: Quota Share and Surplus

Updated 11 October 2026 · Fact-checked

In proportional reinsurance, the insurer and reinsurer share the sum insured, premium and losses in the same proportion. Quota share uses one fixed percentage for every policy. Surplus treaty cedes only the sum insured above the retention, so the ratio changes by policy. To solve, find the ratio, then apply it to premium, loss and commission.

Understand Proportional (Pro-rata) Reinsurance

Proportional (pro-rata) reinsurance means the reinsurer takes a share of each risk. It gets the same share of the premium and pays the same share of each claim. The insurer is the cedant. It keeps a share (the retention) and cedes the rest.

The reinsurer pays the cedant a ceding commission on the ceded premium. This covers the cedant's acquisition and administration costs. Profit commission may also apply, but treat it as given in the question.

There are three forms. Facultative pro-rata reinsurance is arranged risk by risk. The cedant offers each risk and the reinsurer can accept or refuse. Quota share treaty is automatic. A fixed percentage of every policy in the class is ceded, for example 40%. Surplus treaty is also automatic. The cedant fixes a retention per risk, called a line. The treaty capacity is a number of lines, for example 4 lines. Only the sum insured above the retention is ceded, up to that capacity.

The key difference: in a quota share, the ratio is the same for every risk. In a surplus treaty, the ratio differs by risk. A small risk below the retention is kept in full. A big risk cedes a larger share. So surplus treaty evens out the exposure, while quota share also shares the premium of small risks.

On Indian law: section 101A of the Insurance Act, 1938 requires every insurer to re-insure with Indian re-insurers the percentage of the sum assured on each policy that the Authority specifies, and that percentage cannot exceed thirty per cent of the sum assured. Under section 101C the Authority may call for an insurer's re-insurance treaties for examination. Under section 34F it can order changes if terms are not favourable to the insurer or are detrimental to the public interest.

Key rules to remember

Quota share cession: Ceded amount = Quota % × (sum insured, premium or loss); The same % applies to every policy. Retained share = 100% − quota %.
Surplus treaty cession: Surplus = Sum insured − Retention (limited to treaty capacity); If sum insured ≤ retention, nothing is ceded.
Treaty capacity: Capacity = Number of lines × Retention; maximum cover = Retention + Capacity; Any amount above this is outside the treaty and must be placed otherwise, for example facultatively.
Cession ratio (surplus): Cession % = Surplus ceded ÷ Sum insured; Apply this % to premium and to each loss on that risk.
Ceded premium and commission: Net premium paid to reinsurer = Ceded premium × (1 − ceding commission %); Commission is on ceded premium only.
Reinsurer's loss share: Reinsurer's loss = Cession % × Loss; This holds for loss up to the sum insured. Use the cession % of that policy.

How to solve Proportional (Pro-rata) Reinsurance questions

Use this order for any proportional reinsurance question.

1Identify the type: quota share, surplus, or facultative pro-rata.
2For each policy, write the sum insured, premium and loss given.
3Find the cession ratio. For quota share use the stated %. For surplus, ceded = sum insured − retention, limited to capacity, then divide by the sum insured.
4Check capacity. If the sum insured exceeds retention plus capacity, show the excess as uncovered by the treaty.
5Apply the ratio to premium to get ceded premium, and to the loss to get the reinsurer's share.
6Calculate the ceding commission on ceded premium, and then net the premium if asked.
7Find the cedant's net position: retained premium + commission − retained loss.
8State the result in rupees and add one line of comment, such as which treaty suits the portfolio.

Quickest way: Ratio-first shortcut

When to use it: Use when several policies or both premium and loss are asked, and time is short.

Write the cession % for each policy first, in a small table.
Multiply every amount asked (premium, loss) by that single %.
For surplus treaty, a loss on a risk is shared at that risk's %, not at the treaty's average.
Calculate commission last, on ceded premium only.
Check: retained + ceded must equal the total.

Common mistakes in Proportional (Pro-rata) Reinsurance

Ceding the whole sum insured above retention without checking capacity.
Students forget the treaty has a limit of a number of lines.
Fix: Always compute capacity = lines × retention and cap the cession at it.
Applying the treaty's overall percentage to a surplus loss.
Students mix quota share logic with surplus treaty.
Fix: Use the cession ratio of the specific policy: surplus ÷ sum insured.
Sharing losses on the amount above retention only, as in excess of loss.
Proportional and non-proportional covers get confused.
Fix: In pro-rata cover, premium and loss follow the same ratio from the first rupee of loss.
Calculating ceding commission on total premium.
The word 'premium' is read without 'ceded'.
Fix: Commission applies to ceded premium only.
Ceding something on a policy smaller than the retention.
Students subtract a retention automatically.
Fix: If the sum insured is at or below retention, cession is nil and the cedant keeps 100%.
Forgetting that the retention in a surplus treaty is a rupee amount, not a percentage.
Quota share is stated in %, so the habit carries over.
Fix: Read the retention as a line in rupees and convert to % for each risk.

Worked examples

Example 1

A general insurer has a 30% quota share treaty on its fire portfolio. Premium written is ₹80,00,000. Claims paid are ₹50,00,000. Ceding commission is 25% of ceded premium. Find the reinsurer's loss share, the net premium payable to the reinsurer, and the insurer's net result on this portfolio ignoring other expenses.

Show the solution

Ceded premium = 30% × ₹80,00,000 = ₹24,00,000.
Retained premium = ₹80,00,000 − ₹24,00,000 = ₹56,00,000.
Ceding commission = 25% × ₹24,00,000 = ₹6,00,000.
Net premium payable to reinsurer = ₹24,00,000 − ₹6,00,000 = ₹18,00,000.
Reinsurer's share of claims = 30% × ₹50,00,000 = ₹15,00,000.
Retained claims = ₹50,00,000 − ₹15,00,000 = ₹35,00,000.
Insurer's net result = retained premium ₹56,00,000 + commission ₹6,00,000 − retained claims ₹35,00,000 = ₹27,00,000.

Answer: Reinsurer bears ₹15,00,000 of claims; net premium payable is ₹18,00,000; the insurer's net result is ₹27,00,000 before other expenses.

Example 2

A surplus treaty has a retention of ₹10,00,000 and capacity of 4 lines. Three policies, each with premium rate 0.5% of sum insured, have sums insured of ₹8,00,000 (A), ₹30,00,000 (B) and ₹60,00,000 (C). A total loss of 50% of the sum insured occurs on each of B and C. Find the cession on each policy, the ceded premium, and the reinsurer's share of the losses.

Show the solution

Capacity = 4 × ₹10,00,000 = ₹40,00,000. Maximum treaty cover = ₹50,00,000.
Policy A: sum insured ₹8,00,000 is below retention. Cession = nil.
Policy B: surplus = ₹30,00,000 − ₹10,00,000 = ₹20,00,000. Cession = 20 ÷ 30 = 66.67%.
Policy C: surplus = ₹60,00,000 − ₹10,00,000 = ₹50,00,000, but capacity is ₹40,00,000. Ceded = ₹40,00,000. Cession = 40 ÷ 60 = 66.67%. The remaining ₹10,00,000 above the treaty must be placed elsewhere, for example facultatively; otherwise the insurer carries it.
Premium: A = ₹4,000, B = ₹15,000, C = ₹30,000.
Ceded premium: B = 66.67% × ₹15,000 = ₹10,000. C = 66.67% × ₹30,000 = ₹20,000. Total = ₹30,000.
Loss on B = 50% × ₹30,00,000 = ₹15,00,000. Reinsurer pays 66.67% = ₹10,00,000.
Loss on C = 50% × ₹60,00,000 = ₹30,00,000. Reinsurer pays 66.67% = ₹20,00,000.
Total reinsurer loss share = ₹30,00,000.

Answer: Nothing is ceded on A; B and C are each ceded two-thirds. Ceded premium is ₹30,000 and the reinsurer's share of losses is ₹30,00,000. On C, ₹10,00,000 of the sum insured exceeds treaty capacity.

Exam tips

Always draw a small table: policy, sum insured, retention, ceded, cession %. It earns method marks even if arithmetic slips.
In MCQs, check first whether the policy is below retention or above treaty capacity. These are the usual traps.
Be ready to state the difference between quota share and surplus in two lines: fixed % for all risks versus ratio varying with risk size.
Link to law in theory answers: section 101A requires cession to Indian re-insurers as the Authority specifies, capped at thirty per cent of the sum assured, and section 101C allows examination of treaties.
Write the commission calculation as a separate line, and say clearly whether it is on ceded premium.

Practice questions from Structure and Type of Re-insurance

Proportional (Pro-rata) Reinsurance: frequently asked questions

What is the main difference between quota share and surplus treaty?

A quota share cedes the same percentage of every policy. A surplus treaty cedes only the part of the sum insured above a fixed retention, so the ceded percentage changes from policy to policy. Small risks are retained fully in a surplus treaty.

How do you calculate retention lines in a surplus treaty?

One line equals the retention amount. Capacity is the number of lines times the retention. Total cover under the treaty is the retention plus the capacity. For a ₹10,00,000 retention with 4 lines, the treaty covers up to ₹50,00,000.

Is facultative reinsurance proportional?

It can be. Facultative reinsurance means each risk is offered and accepted individually. If the reinsurer takes a share of the sum insured, premium and loss, it is proportional facultative cover.

Who gets the ceding commission?

The cedant receives it from the reinsurer. It is calculated on the ceded premium and compensates the cedant for acquisition and administration costs.