Surplus Share Treaty Explained: 2025 Insights and Pricing Benefits

Julia Kagan, a seasoned financial and consumer journalist, previously served as senior editor for personal finance at Investopedia.

What Is a Surplus Share Treaty?

A surplus share treaty is a specialized form of reinsurance where the ceding insurer retains a predetermined portion of the policy liability, while the reinsurer assumes responsibility for the excess liabilities. This pro-rata reinsurance method is predominantly utilized in property insurance to balance risk exposure.

Key Highlights

• Surplus share treaties enable insurers to retain a fixed liability amount and transfer the remaining risk to reinsurers.
• These agreements involve sharing both premiums and risks between the insurer and the reinsurer.
• This arrangement helps insurers reduce their liabilities and frees up capacity to issue additional policies.
• Reinsurers only cover claims exceeding the insurer’s retained liability limit, differentiating surplus share treaties from quota-share agreements.

How Surplus Share Treaties Work

When underwriting new policies, insurers agree to cover losses up to a specified coverage limit in exchange for premiums. To manage risk and increase underwriting capacity, insurers transfer part of their liability and associated premiums to reinsurers under surplus share treaties. The exact risk-sharing terms are detailed in the reinsurance contract.

In this treaty, the insurer keeps liabilities up to a set amount known as the 'line,' while the reinsurer covers liabilities exceeding this threshold. This selective risk participation distinguishes surplus share treaties from quota-share reinsurance, where risks are shared proportionally. The total coverage capacity is often expressed as a multiple of the insurer’s retained line.

While surplus treaties usually provide capacity for multiple lines, sometimes the total insured amount surpasses what a single treaty can cover. In such cases, insurers may retain the excess risk or enter additional surplus treaties to cover the remainder.

For instance, a property insurer underwriting a $500,000 policy might retain $100,000 as its line, ceding the remaining $400,000 to a reinsurer under a surplus share treaty.

Benefits of Surplus Share Treaty Reinsurance

Surplus share treaty reinsurance offers insurers enhanced protection against large losses, bolstering their financial stability and solvency. It allows insurers to underwrite a broader range of policies without significantly increasing solvency margin costs—the buffer between assets and liabilities. Moreover, this reinsurance approach ensures insurers maintain sufficient liquid assets to handle extraordinary claims, supporting long-term operational resilience.

Explore useful articles in Insurance as of 24-08-2023. The article titled " Surplus Share Treaty Explained: 2025 Insights and Pricing Benefits " offers in-depth analysis and practical advice in the Insurance field. Each article is carefully crafted by experts to provide maximum value to readers.

The " Surplus Share Treaty Explained: 2025 Insights and Pricing Benefits " article expands your knowledge in Insurance, keeps you informed about the latest developments, and helps you make well-informed decisions. Each article is based on unique content, ensuring originality and quality.