As an insurance company, you define what you can keep for your own account on a risk, a category of risks, a book of risks you insure on a line of business (such as Fire). This is your retention or net line. You may opt for one single retention, whatever the type of risk, or different retentions. You then have a table of lines. Above this line, you buy from your reinsurers a capacity expressed in a number of lines, the Surplus treaty. The sum of your Net line and Surplus capacity is your gross Line or Gross Underwriting capacity, according to your table of lines and the Surplus number of lines.
Your net line will be defined depending on:
Your net line is usually expressed in sums insured. There are other criteria possible depending on the Line of Business. Here is an example: for Fire Industrial risks, you may use PML (Probable Maximum Loss) which gives you a bigger underwriting capacity.
However, a word of caution: a PML error may endanger your credibility as a skilled underwriting company, cost you the trust of your reinsurers and the capacity and/or price they are prepared to offer.
Higher capacity and bigger imbalance of the treaty thus imply a different price. Reinsurers may ask a minimum PML to limit their commitments, or may include a PML error clause to share the burden of the PML error at the best possible price.
Advantages:
Disadvantages:
Usages:
Nota bene: Your surplus treaty may not be sufficient to offer the capacity you need to face your clients’ demand or your policy to position yourself on the market facing clients and brokers. On top of your First Surplus, you may then build additional Surplus treaties. The higher capacity you reach, the less the number of risks ceded to the treaty will be, and the higher the imbalance of the treaty. This is another matter to negotiate with your reinsurers.
Other proportional treaties: