Proportional Reinsurance is a system where the reinsurance shares are lost in the same proportion as it will share the policy and premium accounts. Proportional Reinsurance can be divided in to two forms; they are automatic Proportional Reinsurance and facultative Proportional Reinsurance. Proportional Reinsurance is a situation where the reinsured will obtain coverage for a percentage of risk or loss from the reinsurer. So in Proportional Reinsurance the insurer and the reinsurer share all the premiums and loss which is covered by a pre arranged contract. In this type of reinsurance the reinsurer will get the percentage which is already stated for each dollar of premiums. This percentage will be paid from the losses also. A ceding commission is allowed to insurers by reinsurer so as to cover initial cost that the insured incur. which is incurred.
The insurers of the insurance can seek many reasons for coverage. The reason is that the insurer will not be having enough capital to carefully retain all the exposure that is capable of producing. In Proportional Reinsurance a company may cede a particular portion of risk with less commission and will recover the same portion of loss from the reinsurer itself.
There are two basic forms or types of Proportional Reinsurance they are given below:
Both of this refers to the division in expenses, premiums and loss. This will be according to the predetermined percentage or the sum between the reinsurer and carrier. Quota share applies to the total of a company's book of business in a particular area, class type or line of business. This can be a one time or a continuous transaction until this is cancelled. Financing is the main purpose of quota sharing reinsurance. But depending upon the structure capacity, significant stabilization and catastrophe protection can be given. Those surplus accounts or accounts with recoveries will be the only one with which surplus share will apply. They will be proportional for the losses incurred by all accounts ceded.
Surplus shares can be stacked which can then be made to provide higher limits. This will provide capacity and stabilization. And can also provide catastrophe financing and protection. Commission arrangements can be made for both the forms of Proportional Reinsurance and this can be in contingent, fixed and sliding scale.
Proportional Reinsurance has its drawback. Primarily, it transfers more premium than the Proportional reinsurance and can be harder to manage in the case of surplus treaties, where a share of all losses and premiums must be considered per claim and policy. Proportional Reinsurance has thus given more solvency relief while compared to other forms of reinsurance. Proportional Reinsurance will carry on delivering economic capital relief to the decant.