Every answer and its explanation appears here once you have finished the path. Each one then links to the matching glossary entry, where the concept is set out in full with its worked example.
1. What fundamentally separates a treaty cession from a facultative one?
When the reinsurer binds: in advance on a described scope, or after reading the file of a named risk
A treaty is a subscription contract whose object is not a risk but a definition: the reinsurer accepts in advance business it has not seen and which sometimes does not yet exist. A facultative cession is studied with the file in hand and may be declined. Treaties routinely cover very large risks and facultative serves business of every size: neither amount nor class settles it.
Glossary entry · reassurance-facultative2. Why does a reinsurer grant a facultative obligatory arrangement only to a cedant whose underwriting it knows well?
Because the arrangement is asymmetric: the cedant stays free to offer and the reinsurer undertakes to accept, so it receives what she chooses not to keep
The asymmetry sits in the structure itself: only one of the two parties keeps the choice, and it is the one that knows the business. A per-risk ceiling and a tight definition almost always accompany such an arrangement, precisely to bound its effect, and commission exists there as elsewhere. What the reinsurer buys is the cedant's discipline as much as its portfolio.
Glossary entry · traite-facultative3. Inside a treaty's scope, who decides whether a given risk is ceded?
Nobody: the cession is automatic both ways, the cedant must cede and the reinsurer must accept
That double automatism is exactly what makes a treaty valuable: it gives the cedant capacity usable on the day it underwrites, with nobody to consult. A cedant keeping its best business at discretion and ceding the rest would be practicing the adverse selection a treaty exists to prevent, and homogeneous cession clauses are there for that.
Glossary entry · reassurance-traite4. Under a 40% quota share, what does the reinsurer pay on a 25,000 euro loss?
10,000 euros, that is 40% of the loss, as on every loss in scope
A quota share applies the same fraction to premiums and to every loss, with no threshold and no selection: a few hundred euros of water damage splits exactly like a multi-million fire. The percentage quoted is the reinsurer's share, not the cedant's retention, which here keeps the remaining 60%.
Glossary entry · traite-quote-part5. An insurer wants to cushion the effect of an exceptional loss on its account. What does a quota share bring it?
Nothing on that point: a quota share divides good and bad results by the same number, so it transfers volume and not peak
The reinsurer does pay its share of the exceptional loss, but it takes the same share of everything else: the cedant's technical ratio is unchanged after cession, on a smaller base. A portfolio running fifteen points adrift still runs fifteen points adrift after a 50% quota share. Protecting against severity requires a non-proportional treaty, and an annual attachment describes a stop loss.
Glossary entry · quote-part6. What does the ceding commission correct on a proportional treaty?
That the cedant bore acquisition and handling costs on the whole of the premium, while ceding a gross fraction of it to the reinsurer
Without that correction the cedant would be working at a loss on the ceded share, having paid its distribution and its handling on one hundred percent of the premium. That is why a proportional placement is negotiated on the commission rate far more than on the cession rate, which is often set by the capital need.
Glossary entry · commission-reassurance7. Under a pure quota share, what relation does the ceded loss ratio bear to the net loss ratio?
They are equal by construction, commissions aside, which strictly aligns the two parties' interests
The same fraction applying to premiums and to losses, the two ratios are identical. That is this structure's most useful property: the reinsurer cannot win where the cedant loses. It also explains why a quota share places quickly on a sound portfolio and not at all on one that is not. A gap between the two ratios signals a non-proportional treaty, not a quota share.
Glossary entry · ceded-loss-ratio8. Under a surplus treaty, what is compared to establish a risk's cession rate?
The sum insured to the retained line, once, when the risk enters the treaty
Surplus belongs to the proportional family: the rate is set on the sum insured, once, then applies to the premium and to every loss on that risk, small ones included. Comparing the loss to the retention is non-proportional logic, and it is the most common confusion about this structure; comparing an annual accumulation to a retention describes a stop loss.
Glossary entry · retention-conservation9. A risk insured for 10 million euros enters a surplus treaty on a 2 million line. A loss of 400,000 euros occurs. What does the cedant recover?
320,000 euros, that is 80% of the loss, since the risk is ceded at 80%
The cedant keeps 2 million out of 10, that is 20%, and cedes 8 million, that is 80%. That rate is fixed for this risk and then applies to any loss arising from it, whatever its size. The idea that a small loss would give no recovery applies attachment logic to a proportional treaty, and that is precisely what this structure does not do.
Glossary entry · taux-de-cession10. A layer is described as "12 million euros excess of 3 million". What does the reinsurer pay on a 20 million loss, and what is left with the cedant?
The reinsurer pays 12 million and the cedant keeps 8 million: 3 of attachment and 5 above the top of the layer
The layer runs from 3 to 15 million. A 20 million loss exhausts it at 12 and leaves 5 million above, falling on the cedant if no higher layer was bought. The amount above the top is never written off in any accounting sense: it is simply retained, and that is the reason the next layers of a program exist.
Glossary entry · point-attachement11. What distinguishes a working layer from a cat layer?
What it sees: a working layer is hit regularly, a cat layer only by the rare event
The distinction is read on frequency and not on rank: a first layer placed far above a heavy retention is a cat layer, and the third layer of a program with tight tranches can still be a working layer. It drives pricing, on experience where there are losses to count, on an exposure model where there are none.
Glossary entry · working-layer-cat-layer12. A layer with an 8 million euro limit carries two reinstatements. What total limit can the cedant mobilize over the year?
24 million: the original limit plus the two reinstatements, that is three times 8 million
Two reinstatements mean the limit three times over the year, one original and two reinstated, and no more. Each is paid for, almost always pro rata to the amount consumed and frequently pro rata to the time left to run as well. A cedant that budgets its reinsurance premiums without providing for reinstatements discovers its real spend at the worst possible moment.
Glossary entry · reconstitution-garantie13. A windstorm damages two hundred separately insured houses, at an average of 20,000 euros each. The cedant carries a layer of "5 million excess of 500,000" per risk. What does the layer pay?
Nothing: each house is a separate loss compared to the 500,000 attachment, and none reaches it
In a per-risk layer the attachment applies as many times as there are risks affected. The cedant lost 4 million euros and recovers nothing, which is exactly this structure's weakness against an event making many small losses. What answers this case is a per-event layer, where losses are added together before the attachment applies once.
Glossary entry · exces-de-sinistre14. What does an hours clause do in a per-event excess of loss treaty?
It sets a window of fixed length inside which all losses from the named peril are deemed to arise from a single event
No meteorological data says whether a three-day storm is one event or three: the answer is a matter of drafting, and the hours clause is the instrument that gives it, often seventy-two hours for windstorm. It almost always leaves the cedant to elect when the window starts, which is the most concrete lever it holds over its recovery.
Glossary entry · clause-horaire15. A cedant may split a long episode into two events under the hours clause. What is the trade-off?
Two events mean two attachments paid but twice the limit available; one event means one attachment but possible exhaustion
The arithmetic comes before the notification and it depends on the size of the episode: on a loss running well past the top of the program, two events are often preferable; on a middling episode, almost always one. The election belongs to the cedant under most wordings, but the window is anchored on dated facts and does not drift along with the estimates.
Glossary entry · reassurance-catastrophe16. A stop loss is described as "30 points excess of 80%". What does that notation mean?
The cedant carries its loss burden up to 80% of earned premium, and the reinsurer takes what sits between 80% and 110%
The unit of a stop loss is not the million but the ratio point, and that is what makes the notation treacherous for anyone coming from ordinary layers. Translating into euros requires knowing the year's earned premium base, which is not known at the time of purchase: that alone is a notable difference from an excess of loss layer.
Glossary entry · stop-loss17. A mutual pierces its stop loss threshold and recovers a substantial sum. Can it conclude that its year breaks even?
No: a stop loss bounds only the loss burden, and leaves overheads, acquisition costs and the cost of the other treaties outside
The reading that turns a stop loss into result insurance is wrong in both directions: a cedant can pierce its threshold and still run at a loss on expenses, or stay below it and lose money. What is bought is a bound on one named component of the result. The ceiling in points bounds the reinsurer's commitment, it says nothing about the cedant's result.
Glossary entry · net-loss-ratio18. A ceded year shows a positive balance on the profit commission account, but the two preceding years were in deficit. What does the cedant receive?
Nothing until the balance has cleared the carried-forward deficits, the loss carry forward applying before any sharing
The loss carry forward is the mechanism that surprises most, because a technically good year can yield nothing. It comes on top of the reinsurer's expense loading and of the run-off period, which delays the calculation by two or three years. A profit commission booked in advance as revenue is an error discovered long afterwards.
Glossary entry · profit-commission19. Why does a gross burning cost, computed without indexing losses, understate the cost of a layer?
Because old losses, which would pierce the layer at today's repair cost, stay below the attachment at their original amount
Indexation is the first of the three corrections, and its effect is systematic and always in the same direction. The other two are loss development, recent years being reserve estimates revised upward more often than not, and bringing the base to current level, since old premiums describe a portfolio that is no longer the one of the year ahead.
Glossary entry · burning-cost20. A layer with a 20 million euro limit is placed for 1 million of premium. What are its rate on line and payback, and what do they measure?
Rate on line of 5%, payback of 20 years, and payback is only a division: it ignores expenses, brokerage, cost of capital and the probability of being hit
The rate on line is premium divided by limit, that is 1 over 20, and payback is its inverse. The shortcut is convenient because it turns a percentage into a duration, but it says nothing about profitability or actual frequency: a reinsurer pricing on that number alone would be working without knowing whether it makes money.
Glossary entry · rate-on-line21. Two layers show the same rate on line. What can be concluded about what they commit?
Nothing of the kind: reinstatements, the price of those reinstatements, the loss definition, an annual aggregate deductible and the treatment of brokerage can separate everything
The rate on line has the great advantage of depending on no assumption, and that is what makes it comparable; it has the drawback of describing only two numbers of the placement. A layer carrying three free reinstatements offers its limit four times over the year: set against the limit actually mobilizable, it is far cheaper than its nominal rate on line suggests.
Glossary entry · payback22. In the account of a proportional treaty, what exactly does ceded premium mean?
The share of premium that goes to the reinsurer, before deduction of the ceding commission
Ceded premium is the numerator of the cession and the base on which the ceding commission, the reinsurer's expense loading and the ceded loss ratio are computed. What the cedant retains is called net premium. A retroceded premium belongs to another contract, between the reinsurer and its retrocessionaire, and a non-proportional layer carries a standalone premium that is not computed pro rata.
Glossary entry · primes-cedees23. After windstorms Lothar and Martin, in December 1999, several French cedants discovered an effect of their hours clause. Which one, and what did the following renewals do?
The seventy-two hour clause split the sequence into two events, hence two retentions, and renewals extended it to ninety-six and then one hundred and sixty-eight hours
The two storms cost French insurers roughly six billion euros over three days, and a seventy-two hour window could not cover both: the sequence counted as two occurrences, hence two retentions. One mutual carrying a fifteen million euro retention absorbed thirty million net. The 2000 and 2001 renewals lengthened the window on European windstorm layers, which shows that an hours clause is a market term and is renegotiated like a price.
Glossary entry · exces-sinistre-par-evenement24. At equal duration, what else in the wording can still multiply the number of occurrences declared on a single storm?
The scope of the window, one for the whole book or one per zone and per country, and the handling of combined perils such as wind followed by flood
Duration is only one of the four points that decide what the clause is worth. A window per zone or per country multiplies occurrences on a storm crossing several markets, and a sequence where wind precedes flood counts as one or two occurrences depending on whether the clause treats both perils together. To these add what opens the window, first loss or a meteorological fact dated by a third party, and the agreement between the treaty's definition of the event and that of the policies issued: the gap between the two stays with the cedant.
Glossary entry · wording-de-traite25. In 2023, in the United States, more than twenty convective storms passed one billion dollars for roughly sixty billion of insured losses, with no major hurricane. Midwest insurers used up their bottom layer by June while their upper layers were untouched. What does this failure mode test, and what answers it?
The number of reinstatements, and only aggregate cover answers frequency itself
This is horizontal exhaustion: the same bottom layer is hit several times by separate events until its reinstatements are used up, and the program has no first line left while its upper layers remain intact and fully paid for. Raising the top answers the vertical mode, that of a single very costly event, and would have changed nothing here. Buying reinstatements or lowering the attachment pushes the threshold back without addressing accumulation; aggregate cover adds events up instead of treating them one by one, and it is the only one that answers frequency.
Glossary entry · epuisement-horizontal26. A treaty provides for a reinstatement payable at 100% with no further detail. What does that silence leave open, and of what order?
The choice between pro rata the amount consumed alone and pro rata amount and time left to run, a difference that can exceed double
A ten million layer eroded by six, on a layer premium of 1.2 million, reinstates for 0.72 million pro rata the amount alone. If the treaty adds pro rata temporis and five months are left to run, the same consumption reinstates for five twelfths of 0.72 million, that is 0.30 million. The gap is therefore of the same order as the amount itself, and it gets settled when the cedant's cash is already under strain. The number of reinstatements is a separate clause from the percentage.
Glossary entry · epuisement-de-tranche