Surplus Share Reinsurance (Summenexzedent)

Concept

Surplus share reinsurance is a form of proportional reinsurance in which the ceding insurer sets a retention line (a maximum) for each individual risk, up to which it retains the sum insured itself; the reinsurer assumes the portion of the sum insured exceeding that retention, in a cession ratio determined individually for each risk. Unlike quota share reinsurance, the cession ratio is therefore not uniform across all risks, but depends on the individual sum insured of the respective risk.

Mechanics

For risks whose sum insured falls below the retention line, no cession to the reinsurer occurs; only once the retention line is exceeded is the excess amount ceded on a pro-rata basis, with the cession ratio derived from the ratio of the ceded share to the total sum insured, and premiums and losses split between the ceding insurer and the reinsurer according to that ratio.

Relevance for Portfolio Management

Surplus share reinsurance allows the ceding insurer to homogenize its net retained risk across a heterogeneous portfolio with widely varying sums insured, since larger risks are proportionally ceded to a greater extent than smaller ones; the result is a more balanced distribution of the net risk retained in the insurer’s own book than would be achieved under a uniform quota share arrangement.