Contrast the reinsurance premium paid by a primary insurer under an excess of loss treaty and the reinsurance premium paid under a pro rata treaty.
The reinsurance premium paid by a primary insurer under these two kind of treaties has difference in the proportion sharing loss and premium between contracting parties. Under a pro rata treaty,the contracting parties share the same proportion of loss and premium. For instance, if the loss sharing rate is 1:4 for the primary insurer and the reinsurer, the premium sharing rate will also be 1:4. Under an excess of loss treaty,the proportion of loss and premium between contracting parties is probably different. The premium paid by primary insurer under this kind of treaty is more likely to be calculated by probability and amount of the payments for which the reinsurer is responsible, not just based on the loss sharing proportion. On this occasion, the primary insurer could keep more gross premium income retained.