Chapter 7: Surplus Share Treaties

This set of vocabulary flashcards covers key concepts, clauses, and technical terms related to Surplus Share Treaties including operational mechanics and pricing tools.

Surplus share treaty

A type of pro rata reinsurance used for large, complex property loss exposures where the primary insurer determines what percentage share it will retain with respect to each ceded loss exposure.

Line

A specified dollar amount established as the threshold that determines whether the surplus share treaty applies to an individual loss exposure.

Line guide

An underwriting tool that specifies the maximum amounts of insurance that an insurer is prepared to provide for various categories of policies based on potential loss severity.

First surplus treaty

The surplus share treaty that provides the first layer of reinsurance after the primary insurer’s retention.

Automatic capacity

A feature of surplus share treaties where underwriting capacity expands and contracts based on the loss exposure's attributes as defined in the primary insurer's line guide.

Size homogeneity

A condition where loss exposures within a category are of a similar size, making loss forecasting more accurate.

Risks attaching basis

An attachment basis where the treaty applies only to policies issued or renewed on or after the treaty's effective date.

Losses occurring basis

An attachment basis where the treaty applies to losses occurring during the treaty period, which may require reviewing in-force policies for correct retention.

Surplus liability

The specific liability amount ceded to the reinsurer under a surplus share treaty.

Risk (Surplus Share Definition)

Commonly defined as all insured values under one roof, within four walls, or at one location.

Bordereau

A report used by the primary insurer to supply the reinsurer with information regarding the net retention and cession amount for each loss exposure subject to the treaty.

Surplus liability clause

A clause defining the threshold at which the primary insurer will cede its liability and establishing cession priority (first, second, etc.) when multiple layers are used.

Net retention clause

A clause defining the primary insurer's net retention and stating whether the primary insurer is permitted to use underlying reinsurance to support that retention.

Retention and limits clause

A clause that limits the liability amount transferable to the reinsurer and establishes the primary insurer's minimum net retention, often expressed as a number of lines.

Method of cession clause

A clause addressing how loss exposures are ceded, especially for policies with multiple locations, coverage parts, sublimits, or blanket basis insuring.

Limits profile

A table in which the policies subject to the treaty are categorized by coverage limit to evaluate financial consequences and determine pricing.

Occupancy

The nature of the insured's operations, reflecting inherent hazards derived from systems like the ISO occupancy rating system.

Fire Suppression Rating Schedule (FSRS)

A schedule ISO uses to measure major elements of a community's fire suppression system to develop a numerical grade.

Public protection classification (PPC)

A scale from $1$ to $10$ measuring the quality of public fire service, where Class $1$ represents the ideal and Classes $9$ and $10$ apply to unprotected communities.