Surplus Share
A proportional reinsurance treaty where the cession percentage varies by risk size, ceding only amounts above the carrier's retention line.
What It Is
Surplus share is a form of proportional reinsurance where the cession percentage varies from risk to risk based on the size of the risk relative to the carrier's retained line. Unlike quota share, where every risk is ceded at the same percentage, surplus share allows the carrier to retain 100% of small risks within its retention line and cede only the surplus portion of larger risks.
The treaty is expressed in lines, where one line equals the carrier's maximum retention per risk. A five-line surplus treaty means the reinsurer will accept up to five times the carrier's retained line. If the carrier's line is $500,000, the treaty provides up to $2.5M in additional capacity, allowing the carrier to write risks up to $3M ($500,000 retained plus $2.5M ceded).
For a $2M risk under this treaty, the carrier retains $500,000 (25%) and cedes $1.5M (75%). For a $400,000 risk, the carrier retains 100% because it falls within the $500,000 line. This structure allows the carrier to retain more premium on small risks where it is comfortable with the exposure, while transferring the excess on larger risks.
Why It Matters for Brokers
Surplus share treaties explain why carriers have per-risk capacity limits and why pricing may differ for risks of different sizes. Brokers who understand this can better appreciate why a carrier might compete aggressively on a $200,000 TIV property risk but not on a $5M TIV risk in the same class. The carrier retains all the premium on the smaller risk but must share it on the larger one.
Real-World Example
A carrier has a $1M line with a four-line surplus share treaty, giving it total capacity of $5M per risk. A broker submits a $3M property risk. The carrier retains its $1M line (33%) and cedes $2M (67%) to the reinsurer. Premium of $15,000 is split: $5,000 retained, $10,000 ceded. The reinsurer pays a 30% ceding commission on the $10,000 ($3,000 back to the carrier). The carrier's effective net premium is $8,000 on a $1M net retained risk.
Common Mistakes
- 1Not understanding why the same carrier prices similar risks differently based on size, when the variation is driven by the proportion retained versus ceded under a surplus share treaty.
- 2Assuming carrier capacity is unlimited when surplus share treaties define strict per-risk limits.
How brokerageaudit.com Handles This
brokerageaudit.com tracks carrier per-risk capacity limits and alerts brokers when a submitted risk approaches or exceeds the estimated capacity, suggesting additional markets or alternative structures. The system helps brokers understand the capacity constraints driving carrier behavior.