Reinsurance Structures: Proportional and Non-Proportional
A technical overview of reinsurance treaty types and how actuaries analyze their risk transfer properties.
Proportional Reinsurance
Proportional (or pro rata) reinsurance involves sharing premiums and losses between the ceding company and the reinsurer according to a fixed percentage. In a quota share treaty, the reinsurer takes a specified percentage of every risk in a defined portfolio. In a surplus share treaty, the reinsurer takes a percentage that varies by risk based on the ceding company's retention relative to the total sum insured. Proportional treaties are straightforward to administer and provide capacity relief, allowing the ceding company to write more business than its capital would otherwise support.
Non-Proportional Reinsurance
Non-proportional (or excess of loss) reinsurance provides coverage when losses exceed a specified retention. Per-risk excess of loss covers individual large claims. Per-occurrence excess of loss protects against accumulation of losses from a single event (like a hurricane). Aggregate stop-loss covers total losses exceeding a threshold over a defined period. Pricing non-proportional treaties requires analyzing loss distributions above the attachment point, estimating the expected loss in the reinsured layer, and applying loading factors for risk, expenses, and profit. Increased limits factors and loss elimination ratios are key actuarial tools for this analysis.