What are the two types of pro-rata reinsurance?

The correct answer is that the two types of pro-rata reinsurance are quota share and surplus share.

Pro-rata reinsurance involves a sharing arrangement where both the insurer and the reinsurer share premiums and losses in a predetermined ratio. In the case of quota share reinsurance, the insurer cedes a fixed percentage of all premiums and losses to the reinsurer. This means that as the original insurer collects premiums, they also send a corresponding percentage to the reinsurer, allowing both parties to share in the risk and reward over the entire portfolio of business.

Surplus share reinsurance, on the other hand, is structured such that the insurer retains a certain amount of risk (called the retention) on each individual policy and only cedes the excess to the reinsurer. This allows the insurer to keep the more predictable and smaller risks while transferring larger risks to the reinsurer, thereby providing a flexible and manageable approach to handling underwriting.

This distinction makes quota share and surplus share the primary types of pro-rata reinsurance, reflecting their fundamental characteristic of shared premiums and losses based on predefined agreements.