Reinsurance Treaty Structures: Quota Share, Excess of Loss, and Aggregate Stop-Loss

Reinsurance treaty design is the architecture through which a primary carrier transforms its gross risk position into its net retained position after cession. The choice of treaty structure — proportional quota share versus non-proportional excess of loss, per-risk versus catastrophe, per-occurrence versus aggregate — determines how different types of losses are shared between the cedent and the reinsurer, what premium the cedent pays for the protection, and what net risk the cedent retains after all treaties respond. Most carriers operate with multiple treaties in combination — a quota share for capacity support, a per-risk XL for large individual risk protection, a catastrophe XL for event aggregation protection, and sometimes an aggregate stop-loss for overall annual performance protection.

Proportional Treaties: Quota Share and Surplus Share

Proportional (pro rata) treaties are characterized by a defined percentage split of both premiums and losses between the cedent and the reinsurer from the first dollar of every loss. The two primary proportional structures are quota share and surplus share.

Definition — Ceding Commission: The reinsurer’s payment to the cedent under a proportional treaty, expressed as a percentage of the ceded premium. The ceding commission compensates the cedent for the acquisition costs (agent/broker commissions, premium taxes) and overhead expenses associated with generating the ceded business. A ceding commission of 30% on a 40% quota share means the reinsurer, after receiving 40% of gross premium, returns 30% of that ceded premium to the cedent as commission — so the reinsurer’s net retained premium is 40% × (1 − 30%) = 28% of gross premium. Sliding scale ceding commissions adjust the commission percentage based on actual loss experience — higher commissions when actual loss ratios are favorable, lower when adverse — aligning incentives and reducing moral hazard.

A surplus share treaty is a more flexible proportional structure in which the cession percentage varies by the size of each risk. The cedent establishes a “line” — the maximum amount it will retain on any single risk (e.g., $500,000). For risks whose total sum insured (TIV) exceeds the line, the excess above the line is ceded to the reinsurer in proportion to how many “lines” the TIV exceeds the retained line. A $2M TIV risk with a $500K cedent line results in cession of $1.5M (3 lines) out of $2M = 75% to the reinsurer. This structure automatically adjusts the cession percentage to the risk’s size — small risks below the line are retained 100%; large risks are ceded proportionally. Surplus share treaties are common in commercial property lines where risk sizes vary widely.

Non-Proportional Treaties: Per-Risk and Catastrophe XL

Non-proportional (excess of loss) treaties provide coverage only when losses exceed a specified retention — the reinsurer pays nothing on losses below the retention, and pays the excess above the retention up to the treaty limit. The cedent retains the full premium (minus the reinsurance premium paid to the XL reinsurer) but absorbs all losses below the retention.

Per-risk excess of loss (per-risk XL) protects against large individual risk losses. Structure: “[limit] xs [retention] per risk” — e.g., “$4M xs $1M per risk” means the reinsurer pays the portion of any single risk loss between $1M and $5M. The cedent retains all losses below $1M and all losses above $5M (unless additional XL layers are purchased). Per-risk XL is appropriate for portfolios with individual TIV concentrations that could produce single-risk losses above the cedent’s comfortable retention — commercial property, marine cargo, large residential risks.

Catastrophe excess of loss (cat XL) protects against the aggregate accumulation of losses from a single catastrophe event across multiple policies. Structure: “[limit] xs [retention] per occurrence” — the retention and limit apply to the net loss from a single defined occurrence (typically defined as losses arising within 168 hours from the same cause). Reinstatements allow the treaty to respond to multiple events in the same policy year — the first reinstatement restores the full treaty limit after exhaustion, at an additional premium (typically 100% of the pro rata original premium). Without reinstatement, a single catastrophe event exhausting the treaty leaves the cedent exposed to the next catastrophe event in the same year.

Aggregate Treaties and Stop-Loss Structures

Aggregate excess of loss treaties aggregate losses across multiple events or across the entire portfolio, providing protection only when cumulative losses exceed the aggregate retention. Catastrophe aggregate XL aggregates the cedent’s net retained losses from multiple catastrophe events — protecting against a year with several mid-sized catastrophe events, each below the per-occurrence cat XL attachment, that collectively produce significant aggregate losses. This structure has become particularly relevant in recent years as “secondary peril” losses — severe convective storms, winter storms, wildfires, floods not meeting the cat XL per-occurrence threshold — have produced high aggregate losses that per-occurrence cat XL does not protect against.

Aggregate stop-loss treaties apply to the entire portfolio (all lines, all perils) on an annual aggregate basis — the reinsurer begins paying when the cedent’s total annual loss ratio exceeds the specified aggregate retention (e.g., 75% of earned premium), up to the treaty limit. Stop-loss provides the most comprehensive protection against adverse annual results but is expensive because it requires the reinsurer to accept the full spectrum of attritional loss risk, not just catastrophe event risk. For the relationship between reinsurance structure and catastrophe portfolio management, see Catastrophe Portfolio Management: Accumulation Control, PML Management, and Reinsurance Design.

Frequently Asked Questions

Quota Share vs Excess of Loss: Proportional and Non-Proportional Reinsurance Compared

Reinsurance treaties fall into two families. Proportional (pro rata) reinsurance — quota share and surplus share — means the reinsurer shares a predetermined percentage of every risk: it takes that same share of the premium and pays that same share of every loss, from the first dollar. Non-proportional (excess of loss) reinsurance — per-risk and per-occurrence excess of loss, catastrophe XL, and aggregate/stop-loss — works differently: the cedant retains all losses up to an agreed threshold (the attachment point or retention), and the reinsurer only pays the portion of loss that exceeds that threshold, up to a stated limit. Premium is not shared pro rata; instead the cedant pays a negotiated rate for the layer of protection.

The short answer: under quota share, premium and losses are split by a fixed percentage on every policy. Under excess of loss, the reinsurer is a backstop that responds only to large losses above the cedant’s retention. Proportional treaties primarily provide capacity and surplus relief and pass back a ceding commission; non-proportional treaties primarily buy down volatility and protect against severity and accumulation. Most insurers run both — a proportional treaty to support the volume of business written, layered with excess of loss to cap the cost of the largest individual claims and catastrophe events.

Treaty structure	Type	How risk & premium are shared	Cedant retention	Ceding commission	Typical use case
Quota Share	Proportional	Reinsurer takes a fixed percentage of every policy — same share of premium and of every loss, from the ground up.	The complementary percentage of every risk (e.g. 50% if a 50% quota share is ceded).	Yes — reinsurer pays a ceding commission (commonly ~25–40%) to offset the cedant’s acquisition and admin costs.	New or growing lines, surplus/capital relief, uniform portfolios, simple capacity support.
Surplus Share	Proportional	Reinsurer shares premium and losses in proportion to the part of each risk that exceeds the cedant’s retained “line.” The cession percentage varies risk by risk.	A fixed dollar “line” (retention) per risk; the cedant keeps 100% of risks at or below the line.	Yes — ceding commission applies to ceded premium, as in quota share.	Portfolios with a wide spread of sums insured; lets the cedant keep small risks net and cede only the large exposures.
Excess of Loss (per-risk / per-occurrence)	Non-proportional	No pro rata split. Reinsurer pays the part of a loss above the attachment point, up to the layer limit; cedant pays a negotiated rate, not a share of premium.	All losses up to the attachment point (retention) on each risk (per-risk XL) or each event (per-occurrence XL).	No ceding commission — the cedant pays a reinsurance premium for the layer instead.	Capping severity of large individual claims (per-risk) or single events affecting several policies (per-occurrence).
Catastrophe XL	Non-proportional	As above, but applied to the accumulation of many losses from a single catastrophe event (hurricane, earthquake). Reinsurer pays the aggregated event loss above the attachment, up to the limit.	The per-event attachment point (often large), plus any co-participation in the layer.	No ceding commission; layer premium with defined reinstatement terms.	Protecting capital against accumulation of correlated losses from a single natural or man-made catastrophe.
Aggregate / Stop-Loss	Non-proportional	Reinsurer pays when the cedant’s total annual losses (or loss ratio) for a class exceed an agreed threshold, up to a limit. Premium is a negotiated rate for the cover.	All losses up to the annual aggregate attachment, usually expressed as a loss ratio (e.g. 80%) or a dollar amount.	No ceding commission; premium for the aggregate protection.	Smoothing whole-year results; protecting against frequency build-up and overall loss-ratio deterioration.

Worked examples

The math is what separates these structures in practice. Below are three concrete illustrations.

Example 1 — 50% Quota Share on a $2,000,000 policy

The cedant writes a $2,000,000 property policy carrying $4,000 of premium and cedes 50% under a quota share treaty.

• Premium: The reinsurer receives 50% × $4,000 = $2,000 of premium; the cedant keeps $2,000.
• Ceding commission: At a 30% ceding commission, the reinsurer pays back 30% × $2,000 = $600 to the cedant to cover acquisition and admin costs.
• A $600,000 loss: The reinsurer pays 50% × $600,000 = $300,000; the cedant pays $300,000. The same 50/50 split applies to a $1,000 loss or a $2,000,000 total loss — proportional from the first dollar.

Example 2 — “$5M excess of $5M” per-risk excess of loss

The cedant buys a per-risk XL layer written as $5,000,000 excess of $5,000,000 (attachment point $5M, limit $5M, so the layer covers losses from $5M up to $10M per risk).

• A $4,000,000 loss: Below the $5M attachment — the cedant pays all $4,000,000; the reinsurer pays $0.
• A $8,000,000 loss: The cedant retains the first $5,000,000; the reinsurer pays $8,000,000 − $5,000,000 = $3,000,000 (within the layer).
• A $13,000,000 loss: The cedant pays the $5M retention, the reinsurer pays its full $5,000,000 limit, and the cedant is again exposed for the $3,000,000 above the top of the layer (unless a higher layer is bought). After this loss exhausts the limit, the cedant typically pays a reinstatement premium to restore the $5M of cover for the rest of the treaty year.

Example 3 — Aggregate stop-loss at an 80% loss-ratio attachment

A cedant with $10,000,000 of annual earned premium buys stop-loss cover attaching at an 80% loss ratio with a limit running to a 110% loss ratio.

• Attachment in dollars: 80% × $10,000,000 = $8,000,000 of losses. The cedant keeps all losses up to this point.
• Top of cover: 110% × $10,000,000 = $11,000,000, so the layer is $3,000,000 wide (the 80%–110% band).
• Full-year losses of $9,500,000 (a 95% loss ratio): The reinsurer pays $9,500,000 − $8,000,000 = $1,500,000; the cedant’s net result is capped at the 80% attachment for losses inside the band.
• Full-year losses of $12,000,000 (120%): The reinsurer pays its full $3,000,000 limit, and the cedant absorbs the $1,000,000 above the 110% ceiling.

How to choose a structure

Treaty selection comes down to what the cedant is actually trying to solve for.

• Need capacity or capital relief? Proportional treaties (quota share, surplus share) are the lever. Ceding a share of premium reduces required capital and improves the solvency position, and the ceding commission offsets expenses. Quota share suits uniform books; surplus share suits books with a wide spread of sums insured because it lets the cedant keep small risks fully net.
• Worried about severity and volatility? Non-proportional excess of loss is the more capital-efficient answer. It costs less premium than ceding a proportional share and targets only the large losses that threaten earnings, leaving the profitable working layer with the cedant.
• Worried about accumulation? Catastrophe XL protects against many correlated losses from a single event; aggregate/stop-loss protects against frequency build-up and a deteriorating full-year loss ratio.
• Retention sizing: A higher retention lowers reinsurance cost but raises net volatility and capital strain; a lower retention does the reverse. The right level balances risk appetite, capital, and price.
• In practice, combine them. A common program cedes a proportional treaty for capacity, then places excess of loss on the net retained account to cap large claims, and a catastrophe layer on top — matching each tool to the exposure it handles best.

Frequently Asked Questions

What is the difference between quota share and excess of loss reinsurance?

Quota share is proportional: the reinsurer takes a fixed percentage of every policy — the same share of premium and of every loss, from the first dollar — and pays the cedant a ceding commission. Excess of loss is non-proportional: the cedant keeps all losses up to an attachment point (retention), and the reinsurer pays only the portion of a loss above that point, up to a limit, in exchange for a negotiated layer premium rather than a share of the original premium. Quota share mainly provides capacity and surplus relief; excess of loss mainly buys down severity and volatility.

What is the difference between surplus share and excess of loss reinsurance?

Both let the cedant keep smaller risks net, but they work differently. Surplus share is proportional: the cedant sets a retained “line” (a dollar retention) per risk and cedes the surplus above that line, sharing premium and losses in proportion to the ceded part. Excess of loss is non-proportional: the cedant retains losses up to an attachment point and the reinsurer pays only the excess above it, regardless of the policy’s total size. Surplus share splits each qualifying risk by percentage; excess of loss responds only to the size of the loss.

What is the difference between stop-loss and excess of loss reinsurance?

Per-risk and per-occurrence excess of loss respond to a single large loss — on one risk or from one event — that exceeds the attachment point. Stop-loss (aggregate excess of loss) responds to the cedant’s total accumulated losses over a period, usually a year, exceeding an aggregate attachment commonly expressed as a loss ratio. In short, ordinary excess of loss protects against severity of individual losses, while stop-loss protects against the overall annual result and frequency build-up.

Is quota share proportional reinsurance?

Yes. Quota share is the most basic form of proportional (pro rata) reinsurance. The reinsurer assumes a fixed percentage of every risk in the covered portfolio and receives that same percentage of premium while paying that same percentage of every loss. Because losses are shared from the ground up rather than only above a threshold, it is proportional rather than non-proportional.

What is the difference between treaty capacity and treaty limit?

Treaty capacity is the total amount of risk a treaty enables the cedant to write automatically — for a surplus treaty, the cedant’s retained line plus the lines of cover the reinsurer provides (for example, a $100,000 line plus a nine-line surplus treaty gives $1,000,000 of underwriting capacity). The treaty limit is the maximum the reinsurer will pay — for an excess of loss treaty, the width of the layer above the attachment point (for example, the $5M limit in a “$5M excess of $5M” layer). Capacity is about how much business the cedant can support; limit is about how much the reinsurer can be called on to pay.

How does ceding commission work?

In a proportional treaty, the reinsurer pays the cedant a ceding commission on the premium it receives, to reimburse the cedant’s acquisition and administration costs (and often a profit allowance) on the business being shared. A flat ceding commission is simply the ceded premium multiplied by the agreed rate, commonly in the 25–40% range. A sliding-scale commission adjusts inversely with the actual loss ratio — the rate rises as the loss ratio falls and falls as it rises, within set minimum and maximum bounds — so both parties share in good and bad experience. Excess of loss treaties generally have no ceding commission; the cedant pays a layer premium instead.