Financing Complex Exposures with Surplus Share

Question 1

When does surplus share reinsurance apply?

Answer 1

When the total amount of insurance on a policy exceeds a stipulated dollar amount (the insurer’s line).

Question 2

What is the main purpose of surplus share reinsurance?

Answer 2

To allow insurers to write larger policies and generate more business than their retention alone would permit.

Question 3

With what type of insurance is surplus share reinsurance generally used?

Answer 3

Property insurance.

Question 4

What is the “line” in surplus share reinsurance?

Answer 4

The amount of loss exposure the primary insurer retains on a policy.

Question 5

How does surplus share differ from quota share reinsurance?

Answer 5

Quota share: Fixed percentage of every policy

Surplus share: Fixed dollar retention; variable percentage ceded

Question 6

Surplus share treaties serve these main functions for primary insurers (though some may be better served by other types of reinsurance). (3)

Answer 6

1. Increased large line capacity.
2. Stablised loss experience
3. Surplus relief

Question 7

When do primary insurers typically use surplus share reinsurance?

Answer 7

For large, complex property loss exposures when both large line capacity and surplus relief are needed.

Question 8

What other types of reinsurance treaties are commonly used with surplus share?

Answer 8

Quota share treaties

Excess of loss treaties

Question 9

Why are surplus share treaties often layered?

Answer 9

To provide sufficient large line capacity for very large property risks.

Question 10

Does surplus share reinsurance provide adequate catastrophe protection?

Answer 10

No. It limits loss per risk but does not protect against accumulation of losses.

Question 11

Why doesn’t surplus share reinsurance protect against catastrophe losses?

Answer 11

Because multiple losses from a single event can accumulate across many policies.

Question 12

How might a primary insurer use per risk excess of loss with surplus share reinsurance?

Answer 12

Per risk excess of loss increases the insurer’s line

Surplus share provides additional large line capacity

Question 13

What is the strategic benefit of combining per risk XOL and surplus share?

Answer 13

It allows the insurer to retain more risk per policy while still writing very large limits.

Question 14

Surplus share reinsurance addresses two disadvantages of quota share reinsurance. What are they?

Answer 14

Quota share reinsurance requires every loss exposure to be ceded, regardless of whether the ceding company could retain the full risk. Additionally, surplus share reinsurance maintains a steady level of retention for the ceding company rather than a percentage of each loss exposure, which could result in greater expenditures than it can handle.

Question 15

When might quota share reinsurance not be the best fit?

Answer 15

When a primary insurer can safely retain a meaningful amount of loss but needs to insure large, complex property risks.

Question 16

Why might surplus share be preferred over quota share in this case?

Answer 16

It provides some surplus relief while requiring less premium to be ceded to the reinsurer.

Question 17

What is the key disadvantage of quota share for insurers with meaningful retention capacity?

Answer 17

The insurer must cede premium and losses even for risks it can safely retain.

Question 18

What key benefit does surplus share reinsurance provide in contrast to a QS?

Answer 18

A hard limit on the insurer’s loss per risk.

Question 19

Why is a maximum cession important?

Answer 19

To reduce the risk of adverse selection.

Question 20

Why does pricing a surplus share treaty require detailed analysis of policies?

Answer 20

Because the primary insurer’s retention varies by risk, depending on the line selected and the coverage limit of each exposure.

Question 21

What is the primary pricing variable in a surplus share treaty?

Answer 21

The ceding commission.

Question 22

What factors influence the ceding commission in surplus share reinsurance? (4)

Answer 22

Expected treaty profitability

Treaty limits

Primary insurer’s line

Competition in the reinsurance marketplace

Question 23

What is a limits profile?

Answer 23

A table that categorizes policies subject to a reinsurance treaty by coverage limit.

Question 24

What is a line guide?

Answer 24

An underwriting tool that specifies the maximum amount of insurance a primary insurer can write for different categories of risks.

Question 24

Why is a limits profile important in surplus share pricing?

Answer 24

It helps the insurer and reinsurer assess the financial impact of different retention levels.

Question 25

Why are line guides more common in property insurance than liability insurance?

Answer 25

Because property loss exposures are easier to quantify than liability loss exposures.

Question 26

What does a line guide indicate for each class of risk?

Answer 26

A suggested net retention.

Question 27

What factors are reflected in commercial property line guides? (3)

Answer 27

Construction type Occupancy classification Public protection classification

Question 28

How are construction classifications typically determined? (3)

Answer 28

By materials used in: Load-bearing exterior walls Roofs and floors Fire-resistive properties of construction materials

Question 29

What is the Public Protection Classification (PPC)?

Answer 29

A numerical grading of a community’s fire protection capability.

Question 30

Who develops PPC ratings?

Answer 30

Insurance Services Office, Inc. (ISO).

Question 31

What system does ISO use to evaluate fire protection?

Answer 31

The Fire Suppression Rating Schedule (FSRS).

Question 32

What elements does the FSRS evaluate? (3)

Answer 32

Fire department equipment Water supply Response time

Question 33

What is the dominant factor in homeowners line guides?

Answer 33

Public fire protection classification.

Question 34

Why are construction characteristics often ignored in homeowners line guides?

Answer 34

Most homes are frame structures and are considered 100% probable maximum loss in a fire.