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

In a surplus (proportional) treaty of reinsurance, how is the reinsurer's share of premium and claims on each ceded risk determined?

Under a surplus treaty, the reinsurer receives premium and pays claims in the same proportion as the ceded sum insured bears to the total sum insured on each risk. This is a proportional arrangement, unlike excess of loss cover, which depends on a monetary threshold.

  1. ABy the same proportion that the ceded sum insured bears to the total sum insured on that riskCorrect
  2. BBy a fixed rupee amount agreed above the cedant's retention for every claim
  3. CBy the aggregate loss ratio of the cedant's whole portfolio for the year
  4. DBy the reinsurer's own solvency position at the time of the loss

Explanation

In proportional treaties, premium and losses are shared in the ratio of the ceded sum insured to the total sum insured. For example, if a risk of Rs 10 crore has a retention of Rs 2 crore, 80% is ceded and the reinsurer bears 80% of premium and loss. A fixed rupee amount above retention describes non-proportional (excess of loss) cover, not surplus.

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