Identify the two types of pro rate reinsurance.
(1) Quota share：A quota share treaty is an agreement whereby
①the cedent is bound to cede and the reinsurer is bound to accept a fixed proportion of every risk underwritten by the ceding company.
②the reinsurer receives the fixed proportion of all the original premium and pays the fixed proportion of all the claims.
(2) Surplus share： A surplus treaty is an agreement whereby reinsurers will accept an amount of risk surplus to a cedent’s retention.
①The cedent is bound to cede the surplus amount and the reinsurer is bound to accept the surplus amount.
②The reinsurer receives a proportion of the original premium and pays the proportion of the claims.
(3) The differences between these two types.
① In a quota share treaty, the cession percentage is fixed and certain for every risk underwritten. In a surplus share treaty, the cession percentage is variable for each risk.
②The cession limit is stated as a percentage in a quota share treaty and is stated as number of lines in a surplus share treaty.
③The size of risks are smaller in the quota share treaty than in the surplus share treaty.
④The administration of the quota share treaty is simpler than the surplus share treaty.