Surplus Share Treaty

What Is a Surplus Share Treaty?

A surplus share treaty is a reinsurance treaty in which the ceding insurer holds a fixed amount of policy liability and the reinsurer gets a sense of ownership with what remains. Surplus share deals are viewed as pro-rata arrangements and are generally normally utilized with property insurance.

Figuring out a Surplus Share Treaty

An insurance company ordinarily considers a surplus share treaty when it guarantees another policy. Recorded as a hard copy new policies, the insurance company consents to reimburse the policyholder up to a specific coverage limit, and in exchange, it gets a premium. To reduce its overall liabilities and free up capacity to guarantee new policies, an insurer might surrender a portion of its risks (and premiums) to a reinsurer. How much risk the reinsurer acknowledges, and under what conditions, is illustrated in the reinsurance treaty.

In a surplus share treaty, the ceding insurer holds liabilities up to a specific amount, called a line, with any leftover liability being ceded to the reinsurer. The reinsurer, consequently, doesn't partake in all risks and on second thought takes part in just the risks above what the insurer has retained, making this type of reinsurance not the same as [quota-share](/portion share-treaty) reinsurance. The total amount of risk that a reinsurance treaty covers, called the capacity, is normally communicated in terms of a different of the insurer's lines.

Surplus settlements normally have sufficient capacity to cover different lines, however at times, the whole amount to be insured can't be covered under a single reinsurance agreement. In the event that this happens, the ceding insurer either needs to cover the excess amount itself or go into a second reinsurance treaty. This can be achieved by requiring out a second (or third) surplus treaty.

For instance, consider a property insurance company that endorses policies with a coverage of $500,000 and wishes to hold $100,000 of liabilities as its line. The leftover $400,000 in liabilities are ceded to the reinsurer. The $400,000 addresses the amount covered under the surplus share treaty.

Benefits of Reinsurance Under a Surplus Share Treaty

By covering itself against extreme losses, surplus share treaty reinsurance gives the ceding insurer greater security for its equity and solvency and greater stability when uncommon or significant occasions happen. Reinsurance likewise permits an insurer to endorse policies that cover a bigger volume of risks without unreasonably raising the expenses of covering their solvency edges — the amount by which the assets of the insurance company are greater than its liabilities and other comparable commitments. As a matter of fact, reinsurance makes a substantial amount of liquid assets accessible for insurers in case of extraordinary losses.

Features

• A surplus share treaty is a reinsurance agreement by which the ceding insurer holds a fixed amount of an insurance policy's liability while the excess amount is taken on by a reinsurer.
• While taking part in a reinsurance treaty, the insurer shares its risks and premiums with the reinsurer.
• Going into such an agreement reduces the insurer's liabilities and frees up capacity to endorse more policies.
• The reinsurer doesn't take part in each of the risks in a surplus share treaty; provided that the amount of the claim is over the limit set in the treaty.