What is surplus reinsurance?

Surplus reinsurance is proportional, but the ceded share is not a single percentage for every risk. The cedent keeps a line — a stated retention in currency, sometimes varying by occupancy. Capacity above that line cedes in further lines, up to the surplus limit. Small risks cede little or nothing. Large risks cede more. The legal idea is flexible capacity. The operations idea is that every risk needs a cited sum insured and a cited line, or the cession is a guess.

Quota share is the sibling that uses one share for the class. Excess of loss is not surplus: it attaches at a loss amount, not at a sum-insured line. Treaty reinsurance treats all three as different files.

Lines, not a vibe

Fictional walkthrough: ACME Construction Ltd, acme.example. The surplus wording gives the cedent a line of USD 2,000,000 and four surplus lines, so automatic capacity is USD 10,000,000 of sum insured. ACME's occurrence limit on Slip.pdf page 2 is USD 10,000,000. If the surplus uses that limit as the sum insured, the cedent retains one line (USD 2,000,000) and cedes four lines (USD 8,000,000). Ceded share is 80 percent of premium and of loss on that risk, not 30 percent because someone still had the quota-share workbook open.

If the surplus instead uses TIV, you have a fight. Slip TIV is USD 42,000,000. SOV TIV is USD 47,100,000 because a warehouse was added after the slip was typed. Either figure is above USD 10,000,000 of automatic surplus. The leftover is not a rounding item. It is facultative, an error, or a special acceptance. Facultative reinsurance is the pack for the leftover. The treaty exception list should cite the surplus wording. The facultative pack should not be asked to explain the treaty.

Do not impute a line from the average of the bordereau. Do not assume this quarter's SI column is last quarter's TIV column. If ACME is reported with a blank sum insured, the cession cannot be checked. Flag it.

Bordereaux and leftover

A surplus bordereau that omits the underlying limit cannot be validated. Cedent reporting should send a file that includes policy reference, sum insured, line, ceded share, and premium, with the treaty year named. If ACME appears at USD 47,100,000 with a calculated cession as if five lines still covered it, the surplus limit was ignored. That row is an exception.

Line definition has to come from the wording. Some treaties define the line as a currency amount. Some change the line by occupancy. Construction versus offices can be two lines in one contract. If extracted line and bordereau implied line disagree, show both. Accountants should not invent a third line to make the cession footprint look smooth.

Ceding commission, if any, applies to the ceded premium on the surplus share, with the same clause discipline as quota share. Applying a quota-share commission rate to surplus rows because the rates "are usually similar" is not a citation.

What surplus is not

Surplus is not excess of loss. An ACME loss of USD 3,000,000 on a USD 10,000,000 sum insured still shares proportionally if the policy was ceded; it does not wait to attach at USD 5,000,000 unless you also bought XoL. Surplus is not co-insurance on the original policy, though the original policy may have coinsurance that changes the sum insured you should have used.

Year of account still matters. A risk bound in December and reported in January is this surplus or next, according to the wording. If the inbound file mixes years without a column you can cite, stop. Do not split ACME by instinct.