What Does Surplus Reinsurance Mean?
Surplus reinsurance is a reinsurance treaty or automatic reinsurance that allows the insurance company to transfer or cede certain amounts of every risk that exceeds the their retention limit to the insurer without needing the latter’s approval for every policy underwritten and reinsured.
Insuranceopedia Explains Surplus Reinsurance
By virtue of the risk sharing that accompanies the automatic transfer of part of the risks to the reinsurer, surplus reinsurance allows the insurance company to maintain its declared retention limit and cede any excess amounts. This effectively enables it to accept more applications with larger amounts of coverage.
In surplus reinsurance, the reinsurer shares in both premiums and losses in the same ratio that it participates in the total risk. For example, if an insurance company cedes $5,000 of a $10,000 policy, then the reinsurer earns one-half of the premiums and would also pay out one-half of the benefits for legitimate claims.