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📋 '''Surplus reinsurance''' is a form of [[Definition:Proportional reinsurance | proportional reinsurance]] in which a [[Definition:Ceding company | ceding company]] retains a fixed monetary amount of liability on each risk — known as a "line" — and cedes the excess to a [[Definition:Reinsurer | reinsurer]] up to a defined multiple of that retention. Unlike [[Definition:Quota share reinsurance | quota share]] arrangements, where a flat percentage of every risk is ceded regardless of size, surplus reinsurance allows the [[Definition:Primary insurer | primary insurer]] to keep more of the smaller, more manageable risks and transfer a larger share of the bigger exposures. This selectivity makes surplus treaties one of the most widely used structures in [[Definition:Property insurance | property]] and [[Definition:Marine insurance | marine]] [[Definition:Reinsurance | reinsurance]] programs worldwide.

⚙️ Under a [[Definition:Surplus treaty | surplus treaty]], the cedant sets a retention — say, $1 million per risk — and the treaty covers some agreed number of "lines" above that retention, each line equaling the retention amount. A ten-line surplus treaty on a $1 million retention would therefore provide capacity for up to $10 million above the retention, covering risks up to $11 million in total. If the insurer underwrites a policy with a sum insured of $6 million, it retains $1 million and cedes $5 million (five lines) to the reinsurer. [[Definition:Premium | Premiums]] and [[Definition:Loss | losses]] are shared in proportion to the respective participations, so the reinsurer in this example would receive roughly 83% of the ceded premium and bear 83% of any claims. When a risk falls entirely within the cedant's retention, nothing is ceded and the reinsurer has no involvement. Cedants sometimes stack multiple surplus treaties — a first surplus and a second surplus — to accommodate very large exposures, with each layer engaging sequentially once the prior layer is exhausted.

💡 The strategic value of surplus reinsurance lies in the control it gives the [[Definition:Underwriter | underwriter]]. Because the cedant chooses its retention on a risk-by-risk basis within the treaty's parameters, it can retain more premium on well-understood, lower-hazard risks while transferring substantial capacity on peak exposures. This granularity supports better portfolio management and [[Definition:Capital management | capital efficiency]], particularly for insurers writing heterogeneous books where individual risk sizes vary widely. Under [[Definition:Solvency II | Solvency II]] in Europe, [[Definition:Risk-based capital (RBC) | risk-based capital]] frameworks in the United States, and [[Definition:C-ROSS | C-ROSS]] in China, the capital relief obtained from surplus treaties is recognized proportionally, making the structure attractive for regulatory optimization as well. For reinsurers, surplus treaties offer the appeal of participating in a curated portfolio — they tend to see the larger, more carefully underwritten risks rather than a random cross-section of the cedant's book.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Proportional reinsurance]]
* [[Definition:Quota share reinsurance]]
* [[Definition:Surplus treaty]]
* [[Definition:Ceding company]]
* [[Definition:Retention]]
* [[Definition:Facultative reinsurance]]
{{Div col end}}

Definition:Surplus reinsurance - Revision history

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