Category: Reinsurance structures · Reviewed by Al Jabbar, Broker · Specialist Risks · Last reviewed 2026-06-05
Surplus treaty reinsurance is a form of proportional reinsurance in which the reinsurer assumes only the part of each risk that exceeds the cedant’s defined retention (its ‘line’). The treaty capacity is expressed as a multiple of the retention — typically ‘5 lines’, ‘10 lines’ or ‘20 lines’ — giving the reinsurer’s share as a variable proportion that depends on the size of each individual risk.
Category: Reinsurance structures Also known as: surplus treaty, surplus, first surplus Related concepts: proportional reinsurance, quota share, surplus line
In a surplus treaty the cedant chooses a retention (its line, say £2m) and the reinsurer provides a multiple of that retention as capacity (say 10 lines, providing £20m of additional capacity). On any risk with a sum insured up to £2m, no cession arises (the cedant retains 100 per cent). On a risk of £12m, the cedant retains £2m (16.7 per cent) and cedes £10m to the surplus treaty (83.3 per cent). On a risk of £22m, the cedant retains £2m, cedes £20m to the surplus (10 lines × £2m) and the remaining £nil if scope allows for a second surplus or facultative.
The structure gives proportional cession but with a variable cession rate by risk, allowing the cedant to optimise its net portfolio by reference to the size of each individual risk.
Surplus treaties are documented under standard Market Reform Contract format with class-specific clauses. The duty of fair presentation under the Insurance Act 2015 applies. Solvency II recognises the cession as risk mitigation.
Surplus treaties are common in property, marine, energy and other classes where the underlying risks vary widely in size. The structure is particularly valued for property where the cedant writes everything from small SME risks (small premium, retained 100 per cent net) to large industrial complexes (large premium, mostly ceded).
Compared with quota share, surplus is more administratively complex: each risk requires calculation of the cession proportion based on its size relative to the retention. The structure does, however, allow the cedant to retain 100 per cent of small risks and so retain more profitable business net.
Where the largest risks exceed the surplus capacity (10 lines × retention), a second surplus may be placed above the first surplus, or facultative reinsurance used to cover the balance.
An illustrative example: a UK property insurer has a £2m retention and a 10-line first surplus treaty providing £20m of capacity. On a £15m sum insured risk:
The reinsurer receives 86.7 per cent of premium and pays 86.7 per cent of any loss on that risk.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-05. Next review: 2026-12-05.
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