Surplus share reinsurance

Definition

Surplus share reinsurance is a type of reinsurance arrangement where the reinsurer accepts a portion of the risks above a certain threshold from the primary insurer, allowing the insurer to manage its risk exposure more effectively. This arrangement helps insurance companies by enabling them to take on larger risks while protecting their capital and solvency. It also facilitates diversification of risk and ensures that insurers can maintain their underwriting capacity.

5 Must Know Facts For Your Next Test

1. In surplus share reinsurance, the primary insurer retains a portion of the premiums and losses up to a specified limit, while the reinsurer covers the excess.
2. This type of reinsurance is particularly useful for insurers that want to underwrite larger policies without increasing their exposure significantly.
3. Surplus share agreements are typically structured so that the reinsurer's share of premiums and losses is proportional to the amount of risk they assume.
4. Insurers often utilize surplus share reinsurance to maintain financial stability and protect themselves against large catastrophic losses.
5. The arrangement allows insurers to free up capital, enabling them to write more business and enhance their growth potential.

Review Questions

• How does surplus share reinsurance help insurance companies manage their risk exposure?
  • Surplus share reinsurance helps insurance companies manage their risk exposure by allowing them to transfer a portion of their higher risks to reinsurers. By establishing a retention limit, insurers can write larger policies while minimizing their potential losses from catastrophic events. This not only helps stabilize their financial position but also enhances their capacity to take on more business without jeopardizing their solvency.
• Discuss the financial implications of surplus share reinsurance on both the primary insurer and the reinsurer.
  • The financial implications of surplus share reinsurance include improved capital management for primary insurers, as they can maintain their retention limits while transferring excess risks. This allows them to allocate resources more efficiently and increases underwriting capacity. For reinsurers, accepting these risks provides opportunities for profit through premiums received, balanced against potential losses incurred. Additionally, ceding commissions play a crucial role in compensating primary insurers for their costs associated with acquiring new business.
• Evaluate how surplus share reinsurance affects market competition among insurance providers.
  • Surplus share reinsurance affects market competition among insurance providers by enabling smaller or less capitalized insurers to compete with larger firms. By utilizing surplus share arrangements, these insurers can underwrite larger policies and offer competitive premiums without exposing themselves to excessive risk. This dynamic promotes a more competitive market landscape, as insurers can expand their product offerings and customer base while maintaining financial stability. Ultimately, this can lead to better choices and pricing for consumers seeking insurance coverage.

Related terms

Reinsurer: A company that provides financial protection to insurers by taking on some of their risks in exchange for a premium.

Retention Limit: The maximum amount of risk that an insurer is willing to retain for its own account before transferring excess risk to a reinsurer.

Ceding Commission: A fee paid by the reinsurer to the primary insurer for transferring the risk, typically covering acquisition costs and other expenses.