⭐ IC-85 REINSURANCE — CHAPTER 3 (COMPLETE REWRITE)
PROPORTIONAL REINSURANCE TREATIES
(This is one of the MOST heavily tested chapters in GIPSA. I am rewriting it
cleanly, with diagrams, traps, and examples.)
🔷 3.0 WHY THIS CHAPTER MATTERS
Proportional treaties are the foundation of reinsurance.
If you understand this chapter, everything else (Surplus, QS, Combination,
Commission, Retention, Lines) becomes easy.
⭐ 3.1 WHAT IS PROPORTIONAL REINSURANCE? (Core Definition)
In proportional reinsurance, the insurer (cedant) and the reinsurer share:
Premium
Losses
Expenses
Risks
…in the same proportion.
If 40% is ceded, then:
Cedant keeps 60% premium, reinsurer receives 40% premium
Cedant keeps 60% claim, reinsurer pays 40% claim
Proportional reinsurance always works on the SUM INSURED.
⭐ 3.2 TYPES OF PROPORTIONAL TREATIES
There are only two treaty forms in proportional reinsurance:
1. Quota Share Treaty (QS)
2. Surplus Treaty
Combination of the two is also widely used.
🔷 3.3 QUOTA SHARE TREATY (QS)
✔ Definition
A fixed percentage of every risk written in the class is ceded automatically.
Example:
QS = 40%
→ Reinsurer gets 40% of ALL premiums and pays 40% of ALL claims.
✔ Key Characteristics
Fixed % for all risks
Simple to administer
Good for new companies needing capital support
Smooths results (stabilizes loss ratios)
Treaty is compulsory: cedant MUST cede, reinsurer MUST accept
Reinsurer pays commission to cedant
✔ Types of Commission in QS
1. Flat Commission
2. Sliding Scale Commission
3. Profit Commission
These allow the reinsurer to reimburse the insurer for:
acquisition costs
administrative costs
underwriting expenses
✔ Advantages of QS
Immediate capacity expansion
Provides solvency relief
Very stable reinsurance
Protects against poor underwriting years
✔ Disadvantages of QS
Cedant gives up profitable business unnecessarily
Reinsurer pays claims even for small risks
🔷 3.4 SURPLUS TREATY
Surplus is the MOST IMPORTANT proportional system for GIPSA.
✔ Definition
The insurer keeps a fixed retention, and cedes ONLY the portion of the risk
above the retention, up to a limit called “lines.”
⭐ 3.4.1 Key Concepts in Surplus Treaty
1. RETENTION
Amount the insurer keeps per risk.
Example: Retention = ₹5 lakh.
2. LINE
One line = retention amount.
If retention = ₹5 lakh → 1 line = ₹5 lakh.
3. TREATY CAPACITY (NUMBER OF LINES)
If treaty = 10 lines, capacity = 10 × retention.
Example:
Retention = 5 lakh
Lines = 10
→ Maximum cession = ₹50 lakh
Maximum SI accepted = Retention + Cession = ₹55 lakh = 11 lines.
4. CESSION
The amount ceded to reinsurer = (SI – retention), limited to line capacity.
Formula:
Cession = min( SI – Retention , Retention × Lines )
5. % SHARED WITH REINSURERS
Proportions always apply to the ceded part, not to gross SI.
⭐ 3.4.2 Surplus Treaty Examples (Rewritten)
Example 1 – Simple Cession
Retention = 5 lakh
Treaty = 10 lines
Risk SI = 25 lakh
Cession = 25 – 5 = 20 lakh
Lines used = 20/5 = 4 lines
Reinsurer share = 20 lakh
Insurer share = 5 lakh
Example 2 – Treaty Limit Reached
Retention = 5 lakh
Lines = 10
Risk SI = 80 lakh
Needed cession = 80 – 5 = 75 lakh
Treaty max cession = 50 lakh (10 × 5)
So only 50 lakh can be ceded.
Insurer must retain the balance SI beyond treaty capability.
Example 3 – Proportional Sharing for Claims
If SI = 35 lakh:
Retention = 5 lakh
Cession = 30 lakh (6 lines)
Loss = 14 lakh
Retention share = 5/35 = 1/7 = 14.28%
Reinsurer share = 30/35 = 6/7 = 85.71%
Claim sharing:
Insurer pays 2 lakh
Reinsurer pays 12 lakh
🔥 EXAM TRAPS IN SURPLUS (Super Important)
⚠️Trap 1: Surplus % = (cession / SI), NOT (cession / retention).
⚠️Trap 2: Capacity = retention × lines → NOT total SI.
⚠️Trap 3: Maximum SI the insurer can write = (lines + 1) × retention.
⚠️Trap 4: Reinsurer shares only the ceded portion.
⚠️Trap 5: QS ALWAYS applied before Surplus in combination treaties.
🔷 3.5 COMBINATION OF QS + SURPLUS
Used when the company wants:
Stability (QS)
Flexibility + capacity (Surplus)
⭐ Sequence is critical: QS is applied FIRST.
Example:
QS = 40%
Surplus = 5 lines
Retention = 10 lakh
Risk SI = 60 lakh
Step 1 → Apply QS:
Cedant keeps = 60% of SI = 36 lakh
Reinsurer (QS) = 24 lakh
Step 2 → Apply Surplus on cedant’s 36 lakh
Retention = 10 lakh → 26 lakh cedable
Lines = 5 → Surplus capacity = 50 lakh → room available
So cedant cedes 26 lakh to surplus reinsurer.
🔷 3.6 PROPORTIONAL REINSURANCE ACCOUNTING
⭐ 3.6.1 Premium Sharing
Premium is split in proportion to risk share.
Example:
Premium = ₹10,000
Risk share ceded = 60%
→ Reinsurer gets €6,000
→ Cedant keeps €4,000
⭐ 3.6.2 Commission Types
1. Flat Commission
Fixed % on ceded premium.
2. Sliding Scale Commission
Commission varies with loss ratio.
Example:
Loss ratio low → higher commission
Loss ratio high → lower commission
3. Profit Commission
Reinsurer returns part of profit to cedant if treaty profitable.
Formula:
Profit = Premium – (Claims + Commission + Expenses)
Profit Commission = X% of Profit
🔷 3.7 HOW PROPORTIONAL TREATIES IMPROVE INSURER’S
FINANCIALS
Expand underwriting capacity
Reduce volatility
Increase solvency margin
Allow insurer to enter new business segments
Spread risk internationally
🔷 3.8 VISUAL FLOW OF PROPORTIONAL TREATIES
Gross SI
Retention
Surplus (variable %)
Reinsurer Share
Premium & Loss Sharing
Proportional Basis
🔥 CHAPTER 3 — EXAM TRAPS
1. QS = fixed %; Surplus = varied %
2. Surplus lines are multiples of retention, NOT SI
3. % cession = (SI – Retention) / SI
4. QS applied BEFORE Surplus
5. Surplus treaty cannot take more than its line capacity
6. Max SI = retention × (lines + 1)
🔑 CHAPTER 3 GLOSSARY
Term Meaning
Retention Cedant’s share of SI
Term Meaning
Line Retention unit
Surplus Portion above retention ceded
Cession Amount transferred to reinsurer
QS Fixed % treaty
Commissio Reinsurer’s reimbursement to
n cedant
Capacity Max cession possible
🎯 CHAPTER 3 — MCQs (Exam Quality)
1. In a surplus treaty, if SI = ₹45 lakh and retention = ₹5 lakh,
cession is:
A. 40 lakh
B. 5 lakh
C. 10 lakh
D. 45 lakh
Answer: A
2. In QS + Surplus, which treaty is applied first?
A. Surplus
B. QS
C. Any order
D. Facultative
Answer: B
3. In a surplus treaty with 8 lines and ₹10 lakh retention, total
capacity is:
A. 80 lakh
B. 90 lakh
C. 70 lakh
D. 50 lakh
Answer: B
(Explanation: Max SI = retention × (lines + 1) = 10 × 9 = 90 lakh)
4. Commission in a QS treaty is paid by:
A. Cedant
B. Reinsurer
C. Broker
D. Insured
Answer: B
5. Surplus treaty works on:
A. Premium
B. Loss ratio
C. Sum insured
D. Claims only
Answer: C
✅ CHAPTER 3 COMPLETE
Reply “Proceed to Chapter 4” to begin the MOST IMPORTANT chapter:
Non-Proportional Reinsurance, including Risk XL, Cat XL, Stop Loss, and
Aggregate XL (with completely rewritten examples).