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📋 '''Surplus share treaty''' is a type of [[Definition:Proportional reinsurance | proportional reinsurance]] arrangement in which the [[Definition:Ceding company | ceding company]] retains a fixed dollar amount of liability on each risk — known as a "line" — and cedes the surplus above that retention to the [[Definition:Reinsurer | reinsurer]], up to an agreed multiple of the line. Unlike a [[Definition:Quota share treaty | quota share treaty]], which splits every policy at a uniform percentage, a surplus share treaty lets the primary insurer keep the full premium and risk on smaller policies that fall within its retention while transferring exposure on larger risks. This selectivity makes the surplus share structure particularly common in [[Definition:Property insurance | property insurance]] and [[Definition:Commercial lines | commercial lines]], where individual risk sizes vary dramatically.

⚙️ The mechanics hinge on the relationship between the insurer's retained line and the treaty's capacity. If the insurer sets its retention at $500,000 per risk and the treaty provides nine additional lines, the treaty can absorb up to $4.5 million of any single risk, for a total policy limit of $5 million. The [[Definition:Ceding commission | ceding commission]] and [[Definition:Premium | premium]] are split in proportion to each party's share of the risk. On a $2 million policy, for example, the insurer keeps 25 percent of the premium and bears 25 percent of any [[Definition:Loss | loss]], while the reinsurer takes 75 percent of both. Importantly, the ceding company decides on a risk-by-risk basis how much to retain and how much to cede, giving its [[Definition:Underwriting | underwriting]] team granular control over portfolio composition and [[Definition:Net retention | net retention]] levels.

💡 For insurers seeking to grow their book without proportionally increasing [[Definition:Capital requirements | capital requirements]], the surplus share treaty is a powerful lever. It smooths earnings volatility by offloading the peaks of individual large exposures, while the retained line ensures the insurer has meaningful "skin in the game" — a feature that reassures both [[Definition:Rating agency | rating agencies]] and regulators about alignment of interest. The treaty also supports capacity management: an insurer can write policies well above its single-risk appetite, confident that the reinsurance structure will absorb the excess. Because administration requires tracking cessions on a per-risk basis, surplus share treaties demand robust [[Definition:Bordereaux | bordereaux]] reporting and [[Definition:Policy administration system | policy administration systems]], making operational efficiency a prerequisite for getting the most out of this arrangement.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Quota share treaty]]
* [[Definition:Proportional reinsurance]]
* [[Definition:Ceding commission]]
* [[Definition:Net retention]]
* [[Definition:Excess of loss reinsurance]]
* [[Definition:Reinsurance treaty]]
{{Div col end}}

Definition:Surplus share treaty - Revision history

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