Loss ratio cap

A loss ratio cap bounds what a proportional treaty can cost the reinsurer, by expressing its maximum liability as a percentage of ceded premium. A cap at 130 percent means it will never pay more than 1.30 euros of loss per euro of premium received, whatever the actual experience. Above that, everything returns to the cedant. The problem it solves is the unlimited liability inherent in proportional business: by construction a quota share follows losses without bound, and an extreme event or a drift in underwriting can cost the reinsurer several times the premium collected, an exposure its own capital model must be able to quantify. The cap makes it finite. The cost to the cedant is severe, since it loses protection in exactly the scenario where it needs it most, and the cap therefore turns a proportional treaty into something that behaves at the top like an inverted excess of loss. Its presence changes the treaty's economic value entirely, and is read before the commission rate.

A 2026 cyber quota share cedes 40 percent of a 90 million euro premium book, with a cap at 150 percent. A supply chain event drives the gross loss ratio to 215 percent. The reinsurer pays 54 million, that is 150 percent of the 36 million ceded. The cedant absorbs the remaining 23.4 million on its ceded share, on top of its own retention, for a net total it had not modeled.

Loss ratio cap, Cap de sinistralité, Plafond de sinistralité, Loss cap