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📋 '''Proportional treaty''' is a form of [[Definition:Reinsurance | reinsurance]] agreement in which the [[Definition:Cedant | cedant]] and the [[Definition:Reinsurer | reinsurer]] share [[Definition:Premium | premiums]] and [[Definition:Loss | losses]] according to a pre-agreed percentage or formula. Unlike [[Definition:Non-proportional reinsurance | non-proportional]] arrangements — where the reinsurer pays only when losses exceed a specified threshold — a proportional treaty means the reinsurer participates in every risk from the first dollar (or first unit of currency) of loss, in proportion to its share. The two principal forms are the [[Definition:Quota share | quota share]] treaty, where a fixed percentage of every risk is ceded, and the [[Definition:Surplus share treaty | surplus share]] treaty, where the cession varies by risk based on the cedant's chosen [[Definition:Retention | retention]] line.

⚙️ Under a quota share treaty, if the reinsurer agrees to a 40% share, it receives 40% of all premiums written within the treaty's scope and in return pays 40% of every claim. The reinsurer typically returns a [[Definition:Ceding commission | ceding commission]] to the cedant to cover acquisition and administrative expenses — and the size of this commission is a key negotiation variable that reflects the anticipated profitability of the book. Under a surplus share arrangement, the cedant retains a defined amount (its "line") on each risk and cedes only the portion that exceeds that line, up to a maximum number of lines. This allows the cedant to retain more of the premium on smaller risks while transferring a larger proportion of larger exposures. In both structures, the treaty applies automatically to all qualifying risks — the reinsurer does not evaluate individual policies, which distinguishes [[Definition:Treaty reinsurance | treaty reinsurance]] from [[Definition:Facultative reinsurance | facultative reinsurance]].

💡 Proportional treaties serve as a foundational capacity tool for insurers worldwide. For smaller or growing [[Definition:Insurance carrier | carriers]], quota share treaties provide immediate [[Definition:Underwriting capacity | underwriting capacity]], [[Definition:Surplus relief | surplus relief]], and portfolio diversification benefits without the cedant needing to raise additional [[Definition:Capital | capital]]. Regulatory frameworks recognise this: under [[Definition:Solvency II | Solvency II]] in Europe, the [[Definition:Risk-based capital (RBC) | risk-based capital]] framework in the United States, and [[Definition:C-ROSS | C-ROSS]] in China, ceded proportional reinsurance typically reduces required capital in proportion to the risk transferred — provided the reinsurer meets applicable [[Definition:Credit rating | credit]] standards. For reinsurers, proportional business offers volume, broad diversification, and alignment of interest with the cedant. Because the reinsurer's fortune rises and falls with the underlying portfolio, trust in the cedant's [[Definition:Underwriting | underwriting]] discipline is paramount — making proportional treaties as much a relationship instrument as a financial one.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Quota share]]
* [[Definition:Surplus share treaty]]
* [[Definition:Ceding commission]]
* [[Definition:Non-proportional reinsurance]]
* [[Definition:Treaty reinsurance]]
* [[Definition:Retention]]
{{Div col end}}

Definition:Proportional treaty - Revision history

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