FoundationsCore

Cedent

Q: Under a quota share with no commission adjustment, ceding 30% of the book changes the cedent's loss ratio how?

Leaves it unchanged — Proportional reinsurance shares premium and losses in the same ratio, so the loss ratio is identical gross and net. Only commission and expenses move the combined ratio.

Q: Which obligation belongs to the cedent rather than the reinsurer?

Paying the original policyholder's claim — The cedent pays the insured first and collects from the reinsurer afterwards. Cash flow always runs in that direction.

Ceding company

The insurer that hands over part of a risk — and stays on the hook for the whole of it.

Open the interactive version → definition, quiz, structure diagram and progress tracking

Definition

The cedent (or ceding company, or reassured) is the insurer that transfers risk under a reinsurance contract. It writes the original policy, collects the original premium, pays the claim, and then recovers the reinsured portion. In return for cover it owes the reinsurer premium, accurate information, and disciplined underwriting.

Duty of utmost good faith runs both ways, but the practical burden sits with the cedent: full disclosure at placement, bordereaux during the term, prompt loss advices.
The cedent must keep meaningful net retention — "skin in the game" — so its interests stay aligned with the reinsurer's.
It carries reinsurer credit risk and the cash-flow gap between paying a claim and collecting the recovery.

Worked example

A motor insurer with $200M of gross written premium cedes 30% of its book under a quota share. It remains the party the policyholder deals with for every claim; the reinsurer simply reimburses 30% of what it pays.

Scenario · figures in USD

What a cession does to the cedent's own numbers

Meridian Insurance writes $200M gross, cedes 30% under a quota share, and receives a 30% ceding commission on the ceded premium. Gross losses for the year come in at $130M.

Gross written premium	$200M
Premium ceded (30%)	$60M
Ceding commission received (30% of $60M)	$18M
Net retained premium	$140M
Gross losses	$130M
Losses ceded (30%)	$39M
Net retained losses	$91M
Net loss ratio ($91M ÷ $140M)	65.0%

So whatA quota share leaves the loss ratio untouched — 65% gross, 65% net. What it changes is the size of the balance sheet and the expense ratio, because the commission arrives without the losses.

Check your understanding

Under a quota share with no commission adjustment, ceding 30% of the book changes the cedent's loss ratio how?

Leaves it unchanged. Proportional reinsurance shares premium and losses in the same ratio, so the loss ratio is identical gross and net. Only commission and expenses move the combined ratio.

Which obligation belongs to the cedent rather than the reinsurer?

Paying the original policyholder's claim. The cedent pays the insured first and collects from the reinsurer afterwards. Cash flow always runs in that direction.

Word problem

Meridian's own acquisition and admin expenses are 30% of gross written premium. On the numbers above ($200M gross, 30% ceded, 30% ceding commission, $130M gross losses), is the quota share accretive or dilutive to its combined ratio?

Show a hint

Compare the commission it receives on the ceded premium with the expenses it still has to carry on that same premium.

Reveal the worked answer

Gross combined ratio = ($130M losses + $60M expenses) ÷ $200M = 95.0%
Net premium = $140M; net losses = $91M
Expenses still incurred = 30% × $200M = $60M, less commission received $18M = $42M
Net combined ratio = ($91M + $42M) ÷ $140M = $133M ÷ $140M = 95.0%

Exactly neutral. Because the 30% ceding commission matches the 30% expense ratio, the treaty is expense-neutral and the combined ratio is unchanged at 95%. Push the commission to 35% and the treaty becomes accretive; drop it to 25% and the cedent is paying for its capital relief.