Foundations · Section 4
Products and contracts
The financial instruments that transfer reinsurance risk: proportional vs. non-proportional, the key contract structures, and the loss perspectives along the risk transfer chain.
Reinsurance risk is transferred through contracts. A contract defines precisely which losses the reinsurer covers, under what conditions, and up to what amount. Understanding contract structures at a conceptual level is a prerequisite for the mathematical formalisation in Analytics Toolkit and the contract modelling in Financial Modelling.
The two families of reinsurance
Section titled “The two families of reinsurance”Reinsurance contracts divide conventionally into two families, proportional and excess of loss, and the two are combined in practice.1 The split is by how losses are shared between the cedent and the reinsurer. The two families are this section’s simplification, not an exhaustive taxonomy. The quota share page later shows a proportional treaty carrying an event limit borrowed from excess of loss, and hybrids like it recombine the same two mechanisms.
Proportional reinsurance
Section titled “Proportional reinsurance”In proportional reinsurance, the reinsurer takes a fixed percentage of every loss (and receives the same percentage of premium). The sharing is simple and predictable.
The simplest proportional structure is the quota share: the reinsurer agrees to take, say, 25% of all losses in a defined portfolio, in exchange for 25% of the premium.2 The other proportional form is the surplus share, where the ceded percentage varies policy by policy with the sum insured against the cedent’s retention line.3 It needs per-policy sums insured, which the catastrophe model’s loss output does not carry, so this site’s proportional examples are quota shares.
Key properties of proportional contracts:
- The reinsurer participates in every loss, large or small
- The sharing ratio is fixed (or formula-based in some variants)
- Premium and loss move together: if the cedent collects more premium, the reinsurer gets more too
- Simpler to administer, but less capital-efficient for the cedent per unit of premium ceded; the reason, in this site’s assessment, is that the reinsurer is paid for small losses the cedent could carry itself4
- The reinsurer must trust (or independently verify) that the cedent is pricing the underlying risk correctly, since the reinsurer inherits the cedent’s risk selection and pricing quality
Non-proportional reinsurance (excess of loss)
Section titled “Non-proportional reinsurance (excess of loss)”In non-proportional (or excess of loss) reinsurance, the reinsurer only pays when losses exceed a specified threshold. The reinsurer is selling protection against the tail of the loss distribution: it collects premium in exchange for absorbing large losses, while small losses remain entirely with the cedent.
In property catastrophe, the most common form of per-occurrence cover is the catastrophe excess of loss (CatXoL): the reinsurer covers losses between an attachment point and a limit for a single catastrophe occurrence.5 Excess of loss is also written per risk: the attachment and limit apply to each individual policy or location loss rather than to a catastrophe occurrence. Per-risk excess of loss is priced from exposure and loss experience rather than from catastrophe-model output,6 and is out of scope for this site.
A CatXoL layer written “30M xs 10M” (a $30M limit excess of a $10M attachment) splits every occurrence loss three ways:
- Losses below the attachment point ($10M) are entirely retained by the cedent
- Losses within the contract layer ($10M to $40M) are ceded to the reinsurer
- Losses above the exhaustion point ($40M) are not covered: they remain with the cedent
Key properties of non-proportional contracts:
- The reinsurer only pays for large losses that exceed the attachment point
- The maximum payout is capped at the limit
- Premium is typically a fraction of the limit: because the attachment excludes frequent, smaller losses, the expected loss within the layer is much lower than the total expected loss, and the premium reflects this
- More capital-efficient for the cedent: the premium buys protection only where the cedent cannot carry the loss itself4
- More complex to price: the reinsurer must model the probability and severity of losses in the layer
Where an excess-of-loss layer starts paying, and how much it can pay, are its attachment and its limit.
Key contract concepts
Section titled “Key contract concepts”Several concepts recur across contract types, and two of them, attachment and limit, define what an excess-of-loss contract is.
Attachment and limit
Section titled “Attachment and limit”The attachment point is the loss threshold above which the contract starts paying. The limit is the maximum the contract will pay. Together they define a band of risk being transferred. This band is called a layer.
| Term | Definition |
|---|---|
| Attachment point | Loss level where the contract begins to respond |
| Limit | Maximum payment under the contract |
| Exhaustion point | Attachment + limit: the loss level at which the contract is fully consumed |
A contract described as “$30M xs $10M” means: limit of $30M, excess of (attaching at) $10M. The reinsurer pays losses between $10M and $40M.
Retention
Section titled “Retention”The retention is what the cedent keeps. In a quota share, it is the percentage not ceded (if 25% is ceded, 75% is retained). In an excess of loss contract, the cedent retains losses both below the attachment point and above the exhaustion point: everything outside the contracted band stays with the cedent.
Participation
Section titled “Participation”A layer need not be placed with a single reinsurer.7 The cedent (usually through a broker) offers participations: each reinsurer takes a percentage share of the layer. For example, a $30M xs $10M layer might be placed with three reinsurers taking 50%, 30%, and 20% respectively. Each participant receives its share of the premium and pays its share of any claims.
Brokers ask for more capacity than the cedent is buying, so the lines written on a placement often add up to more than the order. The excess comes off in the signing down: the price is untouched and each reinsurer’s line is cut back, except for lines written to stand, which are allocated in full.8 A reinsurer’s signed line is therefore not only its own decision. On an oversubscribed placement, the broker and the cedent decide whose line stands and whose is trimmed, and that decision is not a price comparison.
Why split a layer? The amounts involved are large: a single catastrophe layer can carry hundreds of millions of dollars of limit.9 Few reinsurers want that much exposure to a single risk, and few cedents want to depend on a single counterparty. Spreading participation diversifies counterparty risk for the cedent and concentration risk for each reinsurer. It also allows reinsurers to calibrate their exposure precisely: a reinsurer might want some Florida hurricane risk but not $100M of it, so it takes a 15% line instead.
This is distinct from a quota share: in a quota share, the proportional split applies to every loss from the ground up. With layer participation, the XoL terms (attachment, limit) apply first to the full loss, and only the resulting ceded amount is divided among participants. The layer responds as a single unit; the participation determines who funds it.
Reinstatements
Section titled “Reinstatements”When a CatXoL contract pays a claim, the limit is eroded. A reinstatement restores the limit for subsequent occurrences during the contract period, usually in exchange for an additional premium.
Real provisions differ in more than the reinstatement count (free or paid, with a paid reinstatement’s premium set pro rata to the limit restored or the time remaining), and the CatXoL and reinstatement premium pages describe how this site models them.
Occurrence vs. aggregate
Section titled “Occurrence vs. aggregate”This distinction changes what an attachment and a limit mean.
- An occurrence contract applies its attachment and limit to each occurrence independently. If two hurricanes each cause $25M of loss, each is evaluated separately against the contract terms.
- An aggregate contract applies its attachment and limit to the total loss accumulated across all occurrences in the contract period (usually a year). An aggregate excess of loss is called an AggXoL, also known as an aggregate stop loss.
| Contract Type | Applies To | Example |
|---|---|---|
| Occurrence (CatXoL) | Each occurrence independently | $30M xs $10M per occurrence |
| Aggregate (AggXoL) | Sum of all occurrences in the year | $100M xs $200M annual aggregate |
The distinction determines the shape of the computation. An occurrence contract can be evaluated occurrence by occurrence. An aggregate contract requires summing across all occurrences in a trial before applying the contract terms: it needs trial-level state. The occurrence excess and aggregate excess pages formalise both.
Perspectives on loss
Section titled “Perspectives on loss”The same catastrophe produces different loss figures depending on the participant’s position in the risk-transfer chain. Throughout this site, all perspectives are from the reinsurer’s point of view unless stated otherwise.
| Perspective | Definition |
|---|---|
| Subject loss | The loss entering the contract from the cedent’s book: the input that contract terms operate on |
| Gross loss | What the reinsurer assumes after applying contract terms to the subject loss |
| Recoveries | What the reinsurer gets back from its own outward protections: retrocession, industry loss warranties (ILWs), cat bonds, or other hedges |
| Net loss | Gross minus recoveries: what actually stays on the reinsurer’s books |
Terminology across the chain
Section titled “Terminology across the chain”The industry does not use these terms consistently.11 The same dollar amount can be called “gross,” “ceded,” “subject,” or “ground-up” depending on who is speaking and from which side of the contract they sit. Conversations between insurers, reinsurers, and retrocessionaires can become confusing quickly, not because the concepts are hard, but because the vocabulary shifts with the observer.
To resolve this, notice that the Subject → Gross → Recoveries → Net cycle applies identically at every level of the chain. What changes is which upstream loss amount becomes the Subject.
| Stage | Primary Insurer | Reinsurer | Retrocessionaire |
|---|---|---|---|
| Subject | Loss to the insured | Primary’s Gross | Reinsurer’s Gross |
| Gross | Loss assumed by the insurer | Loss assumed by the reinsurer | Loss assumed by the retro |
| Ceded / Recoveries | → becomes Reinsurer’s Gross | → becomes Retro’s Gross | → (further cession, if any) |
| Net | Gross minus Ceded | Gross minus Ceded | Gross minus Ceded |
The linkage rule: one party’s ceded loss is the next party’s gross loss, and one party’s gross loss is the next party’s subject loss. The chain extends as far as risk is transferred: a retrocessionaire buying protection from a fourth party follows the same pattern.
Retrocession is where the reinsurer is itself the cedent: the loss of its own portfolio is the retro contract’s subject loss, and the same contract terms apply to it. This site follows the chain that far and no further: designing an outward program and measuring what it is worth to the reinsurer are out of scope.
The stages go by other names in the market.
| This site uses | Also known as |
|---|---|
| Subject loss | Ground-up loss, underlying loss, inward loss |
| Gross loss | Assumed loss, loss to the book |
| Ceded / Recoveries | Outward loss, reinsurance recoveries |
| Net loss | Retained loss (reinsurer-side usage, not adopted here; see below) |
Of these, “ground-up loss” deserves particular care. Strictly, it means the original loss to the insured before any contract terms: the primary insurer’s subject loss. But reinsurers often use “ground-up” to mean “loss before our contract terms,” which is actually the cedent’s gross, one step removed.11 This site uses subject loss to avoid the ambiguity.
Similarly, “ceded” and “recoveries” describe the same cash flow from opposite ends. The cedent says “I ceded $30M”; the cedent’s accountant says “We recovered $30M from reinsurance.” Same amount, different framing. “Ceded” describes the outgoing transfer; “Recoveries” describes the financial benefit received. Both appear throughout the industry.
“Retained” spans two balance sheets in market usage: cedents retain the loss outside the contracted band, and reinsurers call their post-recovery position “retained loss.” One word, two owners. A sentence like “the retained loss grew” is unreadable without knowing whose books the speaker means. This site’s convention: retained and retention always refer to the cedent’s holdings (the retained loss is the part of the subject loss the contract did not absorb), and the reinsurer’s post-recovery position is always net loss, never “retained.”
This site’s convention
Section titled “This site’s convention”This site defaults to the reinsurer’s perspective unless stated otherwise:
- Subject = what the cedent’s book produces (the input)
- Gross = what the reinsurer assumes after contract terms (the output)
- Recoveries = what the reinsurer retrocedes or hedges
- Net = Gross − Recoveries = what stays on the reinsurer’s books
Each of these can also be viewed net of premium (loss minus premium received) or net of premium and expenses (loss minus premium minus brokerage, taxes, and fees). These financial perspectives become important in the Applications chapter; for now, the four loss perspectives above are sufficient.
Caldera Re’s contract portfolio
Section titled “Caldera Re’s contract portfolio”Caldera Re’s six contracts use every structure this page has described, and the portfolio is deliberately mixed.
| # | Name | Type | Structure | Peril | Geography | Participation |
|---|---|---|---|---|---|---|
| C1 | SunCoast FL Hurricane CatXoL | Non-proportional | $30M xs $10M, 1 reinstatement | Hurricane | FL, USA | 14.5% |
| C2 | SunCoast CA/AZ Earthquake AggXoL | Non-proportional (aggregate) | $10M xs $15M annual aggregate | Earthquake | CA/AZ | 20% |
| C3 | SunCoast All-US AggXoL | Non-proportional (aggregate) | $50M xs $300M annual aggregate (net of C1, C2) | Multi-peril | USA | 10% |
| C4 | Pacific Mutual CA Earthquake CatXoL | Non-proportional | $10M xs $3M, 1 reinstatement | Earthquake | CA, USA | 25% |
| C5 | Baltica EU Windstorm Quota Share | Proportional | 25% cession | Windstorm | EU | 30% |
| C6 | Atlas Cat Fund JP Earthquake CatXoL | Non-proportional | $30M xs $20M, 2 reinstatements at 100% and 50% | Earthquake | Japan | 15% |
- Three CatXoLs (C1, C4, C6) covering different perils and geographies: they diversify each other because the physical processes that drive them are unrelated, so large losses from more than one of them rarely fall in the same year
- One quota share (C5) provides broad proportional participation in European windstorm risk
- Two AggXoLs (C2, C3): C2 covers SunCoast’s aggregate earthquake exposure, while C3 covers SunCoast’s total US exposure net of C1 and C2 recoveries
- Inuring: C3 explicitly deducts C1 and C2 recoveries before applying its own terms, preventing double recovery
Inuring is one of several features that real contracts add to these structures.
Beyond the basics
Section titled “Beyond the basics”Real-world contracts carry features this page does not take up. The Financial Modelling chapter formalises inuring; the premium-side features below are named where they arise and not modelled, and each has a glossary entry:
| Feature | What it adjusts | Stateful? | Where this site treats it |
|---|---|---|---|
| Sliding scale commission | The ceding commission rate, with the treaty’s loss experience | Yes: the commission rate depends on the year’s loss ratio | Glossary only |
| Profit commission | A share of the reinsurer’s underwriting profit returned to the cedent | Yes: the commission depends on the year’s underwriting result | Glossary only |
| No claims bonus | A premium rebate paid if no claims are made | Yes: the rebate depends on whether any claim occurred | Glossary only |
| Loss corridor | A band of loss ratio inside a proportional treaty that the cedent takes back: the reinsurer pays its share below the band, the cedent bears the band, and the reinsurer’s share resumes above it13 | Yes: its application depends on the running loss ratio | Glossary only |
| Inuring | Another contract’s subject loss, netted of this contract’s recoveries before that contract’s own terms run | Across contracts, not within one | Programs |
| Multi-year term | The contract period, beyond one annual period, with limits that reset at each anniversary | Yes: state carries across years | Out of scope for the contract period term |
| Franchise deductible | Whether the whole loss is covered once a threshold is exceeded, rather than only the excess | No | Glossary only |
Each of these features adds analytical complexity, but they all follow the same pattern: define a rule, apply it to loss data, and track how it interacts with other rules on the same contract. The premium-side rows all carry state because each depends on a result accumulated so far in the contract year, the same property the reinstatement note above described for the loss side.
Inside a reinsurer, five roles produce, consume, or depend on the analytics of those contracts, and each asks something different of the same loss data.
Footnotes
Section titled “Footnotes”-
Swiss Re, Proportional and non-proportional reinsurance (UM3), Christoph Bugmann, 1997. Treats proportional and non-proportional as “these two types of cover” and notes that “combinations of both types of cover also often result in good reinsurance solutions”. Guy Carpenter, Glossary of Reinsurance Terms, which defines pro rata reinsurance as “a generic term describing quota share and surplus share reinsurance” and excess of loss as the generic term covering per risk, per occurrence, and annual aggregate forms. Neither source counts contracts, so the two families are a taxonomy here, not a measured share of the market. ↩
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Swiss Re, UM3. The surplus retention is “defined as a fixed amount”, only risks exceeding it are ceded, cession is effected on the ratio of the liability above the retention to the overall liability, and “the percentage for cession varies depending on the size of the overall liability”. Guy Carpenter’s glossary defines a line as “the amount of the reinsured’s retained insurance liability in a reinsured policy”. ↩
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Aon Benfield, Solvency II for Reinsurance Managers, 2nd edition, July 2010: “the most capital efficient reinsurance products include non-proportional catastrophe covers and traditional excess of loss contracts”, against continued interest in quota share “even though it is not always the most efficient economically”. The underlying result is older: Ka Chun Cheung and Ambrose Lo, “Characterizations of optimal reinsurance treaties: a cost-benefit approach”, Scandinavian Actuarial Journal, 2017, restating Borch (1960) and Arrow (1963): among cessions costing the same expected premium, the stop-loss form minimises the variance of the cedent’s retained loss. The Aon paper predates Solvency II’s entry into force, so the ranking is practitioner consensus and not a measured result under the regime as implemented. ↩ ↩2
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Jack Willard, “Property aggregate reinsurance re-emerges amid expanding market capacity: Gallagher Re”, Artemis, September 2025, quoting a Gallagher Re whitepaper on “the most common form of property cat occurrence cover”. Swiss Re, UM3, sets out the three non-proportional forms: per risk, per event catastrophe, and aggregate excess or stop loss. ↩
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Clark, Basics of Reinsurance Pricing: “The main tools available for pricing per risk treaties are experience and exposure rating”, with the experience rating procedure excluding “catastrophe losses … due to a single event, such as a hurricane or earthquake”, while for catastrophe covers “catastrophe models are now the generally accepted approach for pricing of natural and some man-made events.” ↩
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Julian Burling, Helen Ashenden, and Jacquetta Castle, “London Market Issues: Leaders, Followers and Layers”, Journal of the British Insurance Law Association, Issue 124: “a single large risk may be divided between different insurers, each insurer taking only a share of the total, with several liability only (the subscription market)”, and may additionally be “divided into several layers above a retention, with a different insurer (or insurers) on each layer”. RAA, Fundamentals of Reinsurance and Glossary of Reinsurance Terms, which defines the interest and liabilities agreement as a contract “between the ceding insurer and one or multiple reinsurers in which the percentage of participation of each reinsurer is specified”. ↩
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Homeowners Choice Property & Casualty Insurance Company, County Weighted Industry Loss Reinsurance Contract, 2024, SEC EDGAR, Signing Provisions: “In the event that the written lines hereon exceed 100% of the order, any lines written ‘To Stand’ will be allocated in full and all other lines will be signed down in equal proportions so that the aggregate signed lines are equal to 100% of the order.” L.S. Howard, “Why Reinsurance Prices Are Wrong, and How to Fix Them”, Insurance Journal, November 2021, on the practice: a broker who finds a treaty oversubscribed goes back to the market “to reduce each reinsurer’s commitment by a certain percentage, in a process called signing-down, but the price stays the same.” Burling, Ashenden, and Castle, “London Market Issues”, records the broker’s “usual practice of obtaining substantial oversubscription” and the signing indications given to leading underwriters, which the following market does not receive. ↩
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Citizens Property Insurance Corporation, 2025 Risk Transfer Program, Board of Governors, June 25, 2025. The sliver layer provides “approximately $394 million, in excess of $2.55 billion, of annual, per occurrence coverage”, and Layer 1 “provides $500 million of coverage”. Steve Evans, “Allstate buys nationwide occurrence reinsurance to $11.5bn”, Artemis, April 2026, describing a per-occurrence tower reaching $11.5 billion. ↩
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Citizens Property Insurance Corporation, 2025 Risk Transfer Program, Board of Governors, June 25, 2025. Of a $4.49 billion program, $3.125 billion of capital-markets coverage is placed on a multi-year annual aggregate basis against $1.369 billion of traditional per-occurrence cover. Willard, “Property aggregate reinsurance re-emerges”: in Europe “many insurers continued to purchase property aggregate coverage, sometimes as their only reinsurance protection against natural catastrophes”, while whole-account aggregate cover at earnings-protection attachment “disappeared almost entirely from the menu from 2020” before returning at higher attachment points. No source counts aggregate covers as a share of contracts placed, which is why this page gives no figure. ↩
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Guy Carpenter’s glossary gives “ground-up loss” two meanings in one entry: “In insurance, the gross amount of loss occurring to an insured … beginning with the first dollar of loss and prior to the application to the deductible … required by the policy. In reinsurance, the term refers to the gross amount of loss occurring to the reinsured, beginning with the first dollar of loss and after the application of deductions required by the reinsurance agreement.” RAA, Fundamentals of Reinsurance and Glossary of Reinsurance Terms, records only the second meaning: “the total amount of loss sustained by the ceding company before taking into account the credit(s) due from reinsurance recoverable(s).” ↩ ↩2
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Clark, Basics of Reinsurance Pricing: “Typically, the catastrophe cover applies to the ceding company’s retained exposure net of surplus share, per risk excess treaties and facultative certificates. That is, other reinsurance inures to the benefit of the catastrophe cover.” Guy Carpenter’s glossary works the same arrangement through numerically under “inure to the benefit of”, showing the catastrophe reinsurer’s payment changing with the order of application. ↩
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Chuck Thayer (Willis Re), “Loss Sensitive Treaty Features”, CAS Boot Camp on Reinsurance Pricing Techniques, 2013. The loss corridor among the loss-sensitive features of quota-share treaties: a loss-ratio band the cedent retains, with the reinsurer’s share resuming above it. ↩