Why a direct underwriter's line is mostly someone else's capacity
When a commercial underwriter quotes a line on a large property or liability risk, the number rarely reflects what that insurer is willing to keep on its own balance sheet. It reflects the treaty programme sitting behind the desk. The retained line is small; the rest is ceded to reinsurers under arrangements agreed months earlier, at renewal, before the underwriter ever saw the risk.
This is the part of underwriting that is easy to treat as a black box. A broker submits a risk, gets a line, and assumes the insurer simply decided how much to write. In practice the insurer's net retention, its treaty capacity and the rules of those treaties together set the ceiling. Understanding the structure helps a broker read why one insurer can lead a large sum insured while another cannot, and why terms tighten in some classes even when the local appetite looks healthy.
The building blocks are proportional treaties (quota share and surplus), which share premium and losses by a fixed proportion, and non-proportional treaties (excess of loss), which respond only above a retention. Most carriers run several of these together. The sections below take each in turn, then show how they combine into the line a broker actually sees.
Quota share: the simplest proportional split
In a quota share treaty the reinsurer takes a fixed percentage of every risk the cedant writes within the treaty class, and shares premium and losses in that same proportion. If the share is 40 percent, the reinsurer receives 40 percent of the premium and pays 40 percent of every loss, on every risk, good and bad alike.
Because the reinsurer is taking premium on business it did not underwrite, it pays the cedant a ceding commission to cover acquisition and management costs, commonly in the range of 20 to 35 percent of the ceded premium. That commission is a real part of the cedant's economics: it offsets the cost of originating business the reinsurer then rides along on.
What quota share does and does not solve
Quota share gives a cedant capacity and surplus relief across the whole book, which is useful for a growing insurer or a newer class where the cedant wants to limit net exposure while building experience. What it does not do well is tailor capacity to the size of an individual risk. Because the percentage is fixed, a quota share cedes the same proportion of a small risk as a very large one, which is inefficient when most risks are modest and only a few are large. That is the gap a surplus treaty fills.
Surplus treaty: keeping the small risks, ceding the large
A surplus treaty is also proportional, but the proportion varies risk by risk. The cedant defines a retained line (its net retention per risk), keeps that amount, and cedes the surplus above it to the treaty. The cession percentage on any given risk therefore depends on how large that risk is relative to the retained line.
Consider an insurer with a retained line of one unit and a surplus treaty of several lines. A risk equal to the retained line is kept entirely net; a risk many times larger is mostly ceded, with the cedant keeping only its one-unit line. This lets the insurer keep the premium on the bulk of its small and medium risks, where its net account performs, while still offering large capacity on the occasional big sum insured.
The practical effect for a broker is that an insurer's willingness to lead a large sum insured often tracks the number of surplus lines it holds, not just its stated appetite. When a placement needs more than the surplus can absorb, the insurer turns to facultative reinsurance for that single risk, which is slower and priced case by case.
Excess of loss: paying only above the retention
Proportional treaties share every rupee from the ground up. Excess of loss (non-proportional) treaties work differently: the reinsurer pays nothing until a loss exceeds a specified retention, then pays the excess above it up to the layer limit. The cedant keeps all losses below the retention and is protected against the large ones above it.
Most carriers run more than one excess of loss programme because they protect against different things:
- Per-risk excess of loss protects against a single large loss on one risk that pierces the retention, the kind of severity a surplus treaty might not fully smooth.
- Catastrophe excess of loss protects against the accumulation of many smaller losses from one event, a cyclone or a flood hitting an exposed property book, where the danger is aggregation rather than any single policy.
The two answer different questions. Per-risk asks how bad one risk can get; catastrophe asks how much of the book one event can touch at once. A property insurer typically needs both, alongside its proportional capacity, which is why the phrase treaty programme is plural by design. The interplay decides not just solvency protection but the practical net cost of writing a class, and therefore the price the cedant must charge.
How the layers combine into the line a broker sees
Put the pieces together and the line a direct underwriter offers is the output of a stack. A quota share sets the broad split of premium and losses and returns a ceding commission. A surplus extends per-risk capacity for larger sums insured above the retained line. Per-risk and catastrophe excess of loss sit on the net account to cap severity and event aggregation. Only when a single risk exceeds all of this does facultative reinsurance come into play, negotiated one risk at a time.
GIC Re is the Indian market's principal domestic reinsurer and is ranked among the top global reinsurers by AM Best. It anchors treaty and obligatory cession capacity for the commercial market, which means its appetite and terms feed directly into what direct insurers can offer across classes. When domestic and international treaty capacity tightens or reprices, the direct underwriter's room to move tightens with it.
Why renewal timing matters
Indian treaty placements for property and catastrophe business commonly renew at the 1 April principal date. That renewal sets the capacity and pricing backdrop a direct underwriter carries into the year. A broker presenting a large or catastrophe-exposed risk shortly after a hard treaty renewal is negotiating against terms that were fixed weeks earlier and will not move until the next cycle.
Reading a programme this way turns a flat quote into a structure a broker can work with, knowing which constraints are local appetite and which are treaty mechanics that no amount of local negotiation will shift. Understanding how those treaty terms translate into the wordings and capacity a client ultimately receives is exactly where Sarvada helps. Sarvada gives commercial insurance brokers structured, searchable access to insurer policy wordings and the intelligence around them, so the capacity behind a line is something you can interrogate rather than guess. Request Access to build treaty-aware advice into your large-risk placements.
