Surplus share treaty

A surplus share treaty is a proportional contract in which the cedant sets a retained amount, called a line, and cedes to the reinsurer the fraction of each risk that exceeds that line. Unlike a quota share, where the ceding percentage is identical on every risk, here the percentage varies risk by risk: a risk whose sum insured equals the line is not ceded at all, while a risk worth four times the line is ceded three quarters. Treaty capacity is expressed in numbers of lines, for example nine lines, which sets the maximum writable sum insured at ten times the line. The problem it solves is portfolio heterogeneity: a property insurer whose sums insured range from one hundred thousand to fifty million euros does not want to cede the same proportion on small risks, which it can carry alone, and on large ones, which would distort its loss experience. A surplus treaty therefore evens out net retention in a way a quota share cannot, at the cost of heavier administration since the cession must be computed policy by policy.

A property insurer sets its line at 2 million euros and buys a nine-line surplus treaty, giving 18 million of capacity and 20 million of maximum sum insured. On a warehouse insured for 2 million it cedes nothing. On a plant insured for 10 million it retains 2 million and cedes 8 million, that is 80 percent of the premium and 80 percent of any loss. A 6 million fire at that plant therefore leaves it with 1.2 million net. On a site insured for 25 million the treaty capacity falls short by 5 million, which it must place facultatively.

Traité en excédent de plein, Surplus treaty, Surplus lines treaty, Excédent de capitaux