Last updated on Jan 10, 2024
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What is ceded premium?
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What is loss ratio?
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What is ceded loss ratio?
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How to calculate ceded losses?
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How to calculate net premium and net loss ratio?
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Why are these calculations important?
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Here’s what else to consider
A quota share treaty is a type of reinsurance contract where the ceding company and the reinsurer agree to share a proportion of the premiums and losses of a portfolio of insurance policies. In this article, you will learn how to calculate the ceded premium and loss ratio for a quota share treaty, which are important indicators of the profitability and performance of the reinsurance arrangement.
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1 What is ceded premium?
Ceded premium is the amount of premium that the ceding company pays to the reinsurer for transferring a portion of the risk. It is calculated by multiplying the total premium of the portfolio by the quota share percentage, which is the agreed proportion of risk that the reinsurer assumes. For example, if the total premium of the portfolio is $10 million and the quota share percentage is 40%, the ceded premium is $4 million.
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2 What is loss ratio?
Loss ratio is the ratio of losses to premiums, expressed as a percentage. It measures the profitability of an insurance operation by comparing the claims paid to the premiums earned. A low loss ratio indicates that the insurance company is paying less in claims than it is collecting in premiums, while a high loss ratio indicates that the insurance company is paying more in claims than it is collecting in premiums. For example, if the total losses of the portfolio are $6 million and the total premiums are $10 million, the loss ratio is 60%.
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3 What is ceded loss ratio?
Ceded loss ratio is the ratio of ceded losses to ceded premiums, expressed as a percentage. It measures the profitability of the reinsurance arrangement by comparing the claims paid by the reinsurer to the premiums received by the reinsurer. A low ceded loss ratio indicates that the reinsurer is paying less in claims than it is receiving in premiums, while a high ceded loss ratio indicates that the reinsurer is paying more in claims than it is receiving in premiums. For example, if the ceded losses of the portfolio are $2.4 million and the ceded premiums are $4 million, the ceded loss ratio is 60%.
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4 How to calculate ceded losses?
Ceded losses are the amount of losses that the reinsurer pays to the ceding company for covering a portion of the risk. It is calculated by multiplying the total losses of the portfolio by the quota share percentage, which is the agreed proportion of risk that the reinsurer assumes. For example, if the total losses of the portfolio are $6 million and the quota share percentage is 40%, the ceded losses are $2.4 million.
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5 How to calculate net premium and net loss ratio?
Net premium is the amount of premium that the ceding company retains after paying the reinsurer for transferring a portion of the risk. It is calculated by subtracting the ceded premium from the total premium of the portfolio. For example, if the total premium of the portfolio is $10 million and the ceded premium is $4 million, the net premium is $6 million.
Net loss ratio is the ratio of net losses to net premiums, expressed as a percentage. It measures the profitability of the ceding company's retained business by comparing the claims paid by the ceding company to the premiums earned by the ceding company. A low net loss ratio indicates that the ceding company is paying less in claims than it is collecting in premiums, while a high net loss ratio indicates that the ceding company is paying more in claims than it is collecting in premiums. For example, if the net losses of the portfolio are $3.6 million and the net premiums are $6 million, the net loss ratio is 60%.
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6 Why are these calculations important?
These calculations are important because they help the ceding company and the reinsurer evaluate the performance and profitability of the quota share treaty. By comparing the ceded premium and loss ratio to the net premium and loss ratio, they can assess whether the reinsurance arrangement is beneficial or detrimental to their respective financial positions. They can also use these calculations to adjust the quota share percentage, commission rate, or other terms of the treaty if needed.
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7 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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