What describes pro rata reinsurance?

Pro rata reinsurance is characterized by the method in which premiums, losses, and expenses are shared between the primary insurer and the reinsurer in a proportional manner. This approach means that the reinsurer takes on a specific percentage of both the premiums written by the insurer and the corresponding liabilities for claims that arise. For example, if a reinsurer agrees to take on 30% of the policy, they are entitled to 30% of the premiums collected and are also responsible for 30% of the losses paid out.

This proportional sharing is a key feature that differentiates pro rata reinsurance from other types, such as excess of loss reinsurance, where the reinsurer only pays losses that exceed a certain threshold. Therefore, pro rata reinsurance provides a balanced risk management tool, allowing both the primary insurer and reinsurer to share both the financial benefits and obligations that arise from the policies being reinsured. This method fosters mutual support between the entities involved, ensuring that both parties are aligned in their interests regarding the policies they manage.