Surplus Reinsurance

What Does Surplus Reinsurance Mean?

Surplus reinsurance is a type of reinsurance treaty or automatic reinsurance that enables an insurance company to transfer, or cede, portions of any risk exceeding its retention limit to the reinsurer. This arrangement does not require the reinsurer’s approval for each policy underwritten and reinsured.

Insuranceopedia Explains Surplus Reinsurance

Surplus reinsurance facilitates risk sharing through the automatic transfer of portions of risks exceeding the insurer’s retention limit to the reinsurer. This allows the insurer to adhere to its declared retention limit while ceding any excess, enabling it to accept more applications with higher coverage amounts. It is one of the reasons carriers can write large commercial policies like general liability insurance and commercial umbrella insurance without keeping the full dollar amount of risk on their own books.

Under surplus reinsurance, the reinsurer shares both premiums and losses in proportion to its participation in the total risk. For instance, if an insurance company cedes $5,000 of a $10,000 policy, the reinsurer receives half of the premiums and is responsible for half of the claim payouts for legitimate losses.