Definition of surplus reinsurance

automatic reinsurance that requires an insurer to transfer ( cede) and the reinsurer to accept the part of every risk that exceeds the insurer's predetermined retention limit. The reinsurer shares in premiums and losses in the same proportion as it shares in the total policy limits of the risk. The surplus method permits the insurer to keep for its own account small policies, and to transfer the amount of risk on large policies above its retention limit. For example, assume an insurer issues a policy for $20,000. The insurer keeps $5000 (¼) and transfers the remaining $15,000 (¼) to its reinsurer. This is called a three line surplus because the amount transferred equals three times the retained line of the insurer. The insurer keeps ¼ and transfers ¾ of the premium to the reinsurer. In the event of total loss, the settlements between the insurer and the reinsurer would be effected on the identical ¼-¾ basis. The same principal applies if there is a partial loss, in that the reinsurer must reimburse the insurer in the same proportion as the reinsurance premium received.