Calculate reinsurance retention and cession amounts for quota share and surplus share treaties.
Reinsurance Retention & Cession Calculator
Calculate reinsurance retention and cession amounts for quota share and surplus share treaties.
Input your reinsurance data
Formula
Quota Share:
Retention Amount = Total Sum Insured × Retention Percentage
Cession Amount = Total Sum Insured - Retention Amount
Surplus Share:
Retention Amount = Minimum of (Total Sum Insured, Retention Limit)
Cession Amount = Total Sum Insured - Retention Amount
Cession Percentage = (Cession Amount / Total Sum Insured) × 100
Retention is the portion of risk kept by the insurer; cession is the portion transferred to reinsurers. Quota share uses proportional percentages; surplus share uses fixed retention limits with excess ceded.
Steps
Enter total sum insured (total policy amount).
Select treaty type (quota share or surplus share).
For quota share: Enter retention percentage (0-100%).
For surplus share: Enter retention limit (absolute amount).
Review retention and cession amounts and recommendations.
Additional calculations
Enter your reinsurance data to see additional insights.
Reinsurance retention and cession are fundamental concepts in insurance risk management, representing how insurers balance risk retention with risk transfer.
What is Retention?
Retention is the portion of risk that an insurer keeps on its own books rather than transferring to reinsurers. It represents the maximum exposure the insurer accepts for any policy or risk. Higher retention means the insurer bears more risk but also keeps more premium income.
What is Cession?
Cession is the portion of risk transferred to reinsurers. It is calculated as the difference between total sum insured and retention. Insurers pay reinsurance premiums (ceded premiums) to reinsurers in exchange for this risk transfer. Cession reduces the insurer's exposure but also reduces premium income and requires paying reinsurance costs.
The Balance
The retention vs cession decision involves balancing:
Capital Requirements: Higher retention requires more capital
Profitability: Higher retention keeps more premiums but bears more losses
Reinsurance Costs: Higher cession requires paying more reinsurance premiums
Quota Share Reinsurance
Quota share is a proportional reinsurance treaty where the insurer and reinsurer share premiums and losses in fixed percentages.
How Quota Share Works
In a quota share treaty:
Insurer and reinsurer agree on a percentage split (e.g., 60% retention, 40% cession)
This percentage applies to ALL policies covered by the treaty
Both premiums and losses are shared in the same proportion
If the insurer writes a $1M policy with 60% retention, it keeps $600K and cedes $400K
Advantages of Quota Share
Simple and predictable - same percentage for all policies
Provides proportional coverage automatically
Helps manage overall portfolio risk
Reinsurer shares in all business, including smaller policies
Disadvantages of Quota Share
Must cede even small policies where retention would be safe
Less flexibility - same percentage applies to all sizes
May cede more than necessary on smaller risks
Surplus Share Reinsurance
Surplus share is a non-proportional treaty where the insurer retains a fixed amount (retention limit) and the reinsurer covers the excess above that limit.
How Surplus Share Works
In a surplus share treaty:
Insurer sets a retention limit (e.g., $200K)
For policies below the limit, insurer retains 100%
For policies above the limit, insurer retains the limit amount and cedes the excess
Reinsurance Costs: High reinsurance premiums favor higher retention
Policy Size: Small policies can often be fully retained
Concentration Risk: Geographic or industry concentration may require lower retention
Optimizing Retention
To optimize retention:
Analyze historical loss experience at different retention levels
Compare reinsurance costs vs retained risk costs
Ensure adequate capital for retained exposures
Consider using surplus share to retain small policies fully
Review retention levels regularly as business and capital change
Key Considerations
Capital Requirements
Higher retention requires more capital to support the retained exposures. Insurers must ensure sufficient capital is available to absorb potential losses on retained risks while maintaining solvency ratios and regulatory compliance.
Profitability Impact
Higher retention keeps more premiums but also exposes the insurer to more losses. The profitability impact depends on:
Quality of underwriting and risk selection
Actual loss experience vs expected
Reinsurance premiums saved by higher retention
Capital costs of retained exposures
Reinsurance Market Conditions
Reinsurance pricing and availability affect retention decisions. In hard markets (high reinsurance premiums, limited capacity), insurers may increase retention. In soft markets (lower premiums, ample capacity), insurers may decrease retention to reduce risk.
Conclusion
Reinsurance retention and cession calculations are fundamental to insurance risk management. Understanding quota share and surplus share treaties, calculation methods, and strategic considerations enables insurers to optimize their reinsurance programs. The optimal balance between retention and cession depends on capital capacity, risk appetite, underwriting quality, and market conditions. Regular review and adjustment of retention strategies ensures effective risk management and capital efficiency.
FAQs
What is reinsurance retention?
Retention is the portion of risk that an insurer retains on its own books rather than transferring to reinsurers. It represents the insurer's maximum exposure on any single policy or risk.
What is reinsurance cession?
Cession is the portion of risk transferred to a reinsurer. It is the amount by which the total sum insured exceeds the retention amount. Cession = Total Sum Insured - Retention.
What is quota share reinsurance?
Quota share is a proportional reinsurance treaty where the insurer and reinsurer share premiums and losses in a fixed percentage. For example, if retention is 60%, the insurer retains 60% and cedes 40% of every policy.
What is surplus share reinsurance?
Surplus share is a non-proportional treaty where the insurer retains a fixed amount (retention limit) and the reinsurer covers the excess. For a $1M policy with $200K retention, insurer retains $200K and cedes $800K.
How is retention calculated in quota share?
In quota share, retention amount = Total Sum Insured × Retention Percentage. For example, $1M policy with 60% retention = $600K retention, $400K cession.
How is retention calculated in surplus share?
In surplus share, retention amount = Minimum of (Total Sum Insured, Retention Limit). If sum insured exceeds retention limit, the excess is ceded. For example, $1M policy with $200K limit = $200K retention, $800K cession.
What is cession ratio?
Cession ratio = (Reinsurance Premiums Ceded / Total Premiums Written) × 100. It indicates what percentage of premiums are transferred to reinsurers. Higher ratios indicate greater reliance on reinsurance.
How do I choose between quota share and surplus share?
Quota share provides proportional coverage for all policies, while surplus share only covers amounts above retention. Use quota share for consistent risk sharing; use surplus share when you want to retain small policies fully and only cede large exposures.
What factors affect retention decisions?
Retention decisions consider: capital adequacy, risk appetite, reinsurance costs, policy size, concentration risk, regulatory requirements, and profit objectives. Higher retention increases potential profits but also increases capital needs and risk exposure.
How does retention affect profitability?
Higher retention means keeping more premiums but also bearing more losses. Insurers with adequate capital and good underwriting can profit from higher retention. Lower retention reduces risk but also reduces premium income and requires paying reinsurance commissions.
Summary
This tool calculates reinsurance retention and cession amounts for quota share and surplus share treaties.
Outputs include retention amount, cession amount, cession percentage, interpretation, recommendations, an action plan, and supporting metrics.
Formula, steps, guide content, related tools, and FAQs ensure humans or AI assistants can interpret the methodology instantly.
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Calculate reinsurance retention and cession amounts for quota share and surplus share treaties.
How to use Reinsurance Retention & Cession Calculator
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Frequently asked questions
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