Proportional vs Non-Proportional Reinsurance: How to Choose the Right Structure
Reinsurance is the backbone of stability in the insurance ecosystem. It allows insurers to manage volatility, protect capital, and underwrite more business confidently. But not all reinsurance structures serve the same strategic purpose. The choice between proportional and non-proportional reinsurance can fundamentally shape an insurer’s risk profile, earnings stability, and growth potential.
Understanding when to use quota share versus excess of loss arrangements is therefore essential—not only for managing solvency but also for aligning reinsurance strategy with long-term business objectives.
Understanding the Two Structures
Proportional Reinsurance: Sharing Premiums and Losses
In a proportional (pro rata) arrangement, the insurer (cedent) and reinsurer share premiums and losses in an agreed percentage. The most common forms are quota share and surplus treaties.
Quota Share: The reinsurer takes a fixed percentage of every policy in a portfolio. For example, a 40% quota share treaty means the reinsurer covers 40% of all premiums and 40% of all claims.
Surplus: The reinsurer covers only the portion of risk exceeding the insurer’s retention limit, allowing more flexibility.
Advantages:
Provides strong capital relief and immediate risk transfer.
Stabilizes underwriting results, especially for new or rapidly growing portfolios.
Offers valuable ceding commissions that can support operational expenses.
Example:
When a new motor insurer enters an emerging market, it may lack historical loss data and capital depth. A 50% quota share treaty enables it to write more policies without breaching solvency ratios. In return, the reinsurer gains proportional participation in a potentially profitable line of business.
Non-Proportional Reinsurance: Paying Only When Losses Exceed a Threshold
In non-proportional structures, the reinsurer only pays when losses exceed an agreed retention—essentially acting as a catastrophe buffer.
The most common types are:
Excess of Loss (XoL): Reinsurer pays claims above a specific limit per risk or per event.
Stop-Loss: Protects against aggregate losses exceeding a percentage of premiums or a fixed amount.
Advantages:
Protects the insurer from high-severity, low-frequency events (e.g., natural catastrophes, industrial fires).
Provides targeted capital protection without ceding daily underwriting profits.
Typically cheaper than proportional reinsurance, as the reinsurer only pays for severe losses.
Example:
A property insurer in Florida may buy an excess-of-loss treaty attaching at $20 million and capping at $200 million per event. This structure allows the insurer to retain manageable losses while safeguarding its balance sheet from hurricane-level catastrophes.
When to Choose Which
Choose Proportional Reinsurance When:
You Need Capital Support or Are Growing Rapidly:
Start-ups and expanding insurers often use quota share treaties to leverage reinsurer capacity and satisfy regulatory solvency requirements.Your Portfolio Has Limited Data or Volatility Is High:
Sharing risk proportionally helps stabilize results when historical performance is uncertain.You Want Reinsurer Partnership and Expertise:
Reinsurers in proportional deals often provide pricing guidance, claims management, and portfolio analytics—acting as strategic partners.
Choose Non-Proportional Reinsurance When:
You Have Adequate Capital but Want Protection Against Severe Losses:
Established insurers typically prefer excess-of-loss cover to smooth earnings and defend solvency from catastrophic events.You Seek Cost Efficiency:
XoL arrangements can be more economical, since reinsurers only cover rare, large losses.You Have Mature Underwriting Capabilities:
Experienced insurers who trust their pricing models and claims data retain day-to-day risk and use non-proportional layers for tail protection.
A Hybrid Approach in Practice
In reality, insurers rarely rely on a single form of reinsurance. Most portfolios combine quota share and excess of loss layers to achieve balanced protection.
Case Study:
A European property insurer with €1 billion in premiums might retain 60% of its portfolio through a quota share treaty and buy excess-of-loss coverage attaching at €10 million per event.
The quota share supports solvency and earnings stability.
The excess-of-loss provides catastrophe protection.
Together, these structures ensure the insurer can grow while maintaining resilience against shocks—an approach increasingly common under Solvency II capital rules.
According to Swiss Re’s Sigma Report (2024), global reinsurance premiums grew by 8% in 2023, largely driven by heightened catastrophe activity and tighter capital standards. This reflects a shift: insurers are becoming more strategic in how they blend reinsurance structures to manage both capital efficiency and earnings volatility.
Professional Takeaway
Choosing between proportional and non-proportional reinsurance isn’t merely about cost—it’s about aligning risk appetite with strategic goals.
Proportional treaties build stability and partnerships.
Non-proportional covers fortify against extreme volatility.
Combining both allows insurers to adapt dynamically to evolving risk landscapes.
Ultimately, the best reinsurance structure is one that supports sustainable growth, satisfies regulatory capital requirements, and strengthens long-term profitability.
In today’s climate of rising catastrophe losses and capital sensitivity, the right balance between quota share and excess-of-loss protection can define whether an insurer thrives—or merely survives.
