Loss ratio cap
A limit capping the reinsurer's liability on a proportional treaty at a multiple of ceded premium.
A loss ratio cap limits what a proportional treaty can cost the reinsurer, by setting its maximum liability as a percentage of ceded premium. With a cap at 130 percent, it will never pay more than 1.30 euros of loss per euro of premium received, whatever the actual experience. Above that, everything goes back to the cedant. Without a cap, proportional business carries unlimited liability. A quota share follows losses all the way up, and an extreme event or an underwriting drift can cost the reinsurer several times the premium it collected, an exposure its own capital model has to be able to quantify. The cap makes it finite. The cedant pays a steep price for that, since it loses protection in exactly the scenario where it needs it most. At the top end, the proportional treaty starts to look like an inverted excess of loss. The cap changes the treaty's economics entirely, and you read it 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.
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