Proportional Reinsurance (Proportionale Rückversicherung)

Concept

Proportional reinsurance is one of the two fundamental forms of reinsurance, in which premiums and losses are split between cedent and reinsurer according to a fixed percentage agreed in advance. If, for example, the reinsurer assumes 30% of a treaty, it receives 30% of the agreed premium and, in return, bears 30% of every loss that occurs, regardless of its size.

Main Forms

The two most important forms of proportional reinsurance are quota share reinsurance, under which a fixed percentage, uniform across all risks in a portfolio, is ceded, and surplus share reinsurance, under which the proportional cession share varies per individual risk and increases with the sum insured, in order to provide stronger protection particularly for the largest individual risks in a portfolio.

Relevance for the Cedent

Proportional reinsurance serves the cedent primarily to smooth balance sheet volatility, to increase its own underwriting capacity for large risks, and to provide direct financial support through the reinsurer’s proportional assumption of acquisition costs (a ceding commission); unlike non-proportional reinsurance, which primarily serves to protect against extreme losses, proportional reinsurance operates evenly across the entire loss experience of a portfolio.