In a surplus share agreement, how does the reinsurer's payment of losses relate to the ceding company's retention?

In a surplus share agreement, the reinsurer’s payment of losses is contingent upon the ceding company’s retention level. Specifically, the reinsurer only begins to pay for losses that exceed the amount retained by the ceding company. This structure is designed to protect the reinsurer from smaller claims while allowing the ceding company to cover its share of losses up to the agreed retention limit. Essentially, the ceding company bears the initial risk up to a specified threshold, and once that threshold is surpassed, the reinsurer steps in to cover the additional losses.

This arrangement helps in risk management by allowing the ceding company to limit its exposure while still benefiting from coverage for larger, potentially devastating losses. The mechanism ensures that the reinsurer only pays when the losses significantly impact the ceding company, which aligns their interests in managing underwriting risk effectively.