An insurer pays a $3,500,000 claim, but its financial statement never shows the full amount as its own. Reinsurance carves that loss into three views: gross, ceded, and net. Getting the split right drives reserves, IBNR, and the balance sheet.
Every loss can be reported three ways. Gross loss is the full amount before any reinsurance recovery. Ceded loss is the piece the reinsurer reimburses. Net loss is what the primary company retains for its own account.
KEY: The identity that governs everything is gross = ceded + net. If you know any two, the third follows by subtraction. This holds for paid losses, case reserves, and IBNR alike.
You estimate claim liabilities on all three bases. Gross reserves feed the liability side; ceded reserves become a reinsurance recoverable asset; net reserves show the true retained exposure.
In quota share, the reinsurer takes a fixed fraction of every loss, called the cession rate. If the cession rate is 30%, the reinsurer pays 30% of each claim and the insurer keeps 70%.
Common mistakes
- Ceding below the retention. On a $300,000 claim under a $500,000 retention, the ceded amount is $0, not a proportional slice. Excess layers ignore everything below attachment.
- Forgetting the limit cap. A $1,200,000 claim on a $500,000 xs $500,000 layer cedes $500,000, not $700,000. Excess above retention plus limit returns to the insurer.
- Applying quota share only to large claims. Quota share cedes the cession rate on every claim, including small ones. Treating it like excess understates ceded losses.
Bottom line
- Gross loss is before reinsurance; ceded loss is the reinsurer's share; net loss is what the primary insurer keeps. Gross minus ceded equals net, always.
- Proportional (quota share) cedes a fixed fraction: ceded equals cession rate times gross; net equals one minus cession rate times gross.
- Excess of loss cedes only the layer above a retention, capped at a limit; a layer "L xs R" attaches at R and pays up to L.
- Aggregate stop-loss applies to total losses for the period; read whether a stated limit bounds the reinsurer's payment or the insurer's net ultimate.
Exam shortcut
For any excess claim, compute two numbers first: the retention and retention plus limit. Ceded is zero below the lower, the full limit above the upper, and the gap in between. This handles every per-claim XOL split. For quota share, never threshold anything. Multiply gross by the cession rate for ceded and by one minus the cession rate for net, on every claim regardless of size.
The full lesson (about 2,896 words, 19 min read) adds 3 worked examples, all 8 common mistakes, a self-check, free in the app.
Learning objectives
- B19
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