The important feature of Surplus Reinsurance Treaty is this that the direct insurer agrees to reinsure only the surplus amount, after its retention, and the reinsurers agree to accept such cessions, usually up to a predetermined upper limit. Surplus reinsurance treaties are usually arranged in lines, each line being equal to insurer’s own retention. This means that the insurer can automatically make a gross acceptance of the risk to the extent of his own retention, plus, the amount of retention multiplied by the number of lines for which treaty has been made.
Example 1. Proposition: ABC Insurance Co. of Canada has received a proposal for insurance, from a textile mill for an amount of CAD 1,00,00,000, The company’s retention for this class of business is CAD.10,00,000, A 9-line surplus treaty exists. The arrangement will be as follows :
ABC’s Retention = CAD.10,00,000
Treaty consumes (9 x 10 lac ) = CAD.90,00,000
Example-2. Proposition : Same as in Example 1, but the sum insured is CAD. 70,00,000.
Arrangement will be :
ABC’s Retention : CAD.10,00,000
Treaty receives : CAD.60,00,000
It will be observed by my visitors that the treaty receives the balance only after ceding Co’s retention and even though the treaty has got a higher capacity, it is under placed because the sum-insured itself is lower than capacity and therefore they get the full balance of the sum-insured.
Example-3. Proposition: Same as in Example – 1, but the sum insured is CAD. 1,50,00,000 and a treaty upper limit exists for CAD. 80,00,000.
Arrangement will be :
ABC’s Retention : CAD. 10,00,000
Treaty consumes : CAD. 80,00,000
(upper limit applies )
Automatic cover : CAD. 90,00,000
The visitors should observe that here, ABC company has got an automatic arrangement up to CAD. 90,00.000, and there still remains a surplus of CAD. 60,00,000 for which no previous arrangement is there. The insurer, therefore, can only make a gross acceptance of CAD. 90,00,000. Alternatively, a facultative arrangement (unless a Second Surplus exists)must be made for the balance of CAD. 60,00,000 before issuing a cover for the full amount. Losses are borne by all the reinsurers in the same proportion of reinsurance arrangement.