Proportional CoversApplied

Deposit & Minimum Premium

Q: A treaty's adjusted premium formula produces a figure below the agreed minimum premium. What does the cedent actually pay?

The minimum premium — the floor always wins — The minimum is a hard floor. Whatever the rate formula produces, the cedent never pays less than the agreed minimum.

Paying before the final number is known

Cash paid during the year against a premium that can only be finalised after the year is over.

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

Definition

A deposit premium is an estimated instalment paid during the treaty period, before the actual subject premium is known — because a treaty rated as a percentage of a book still being written cannot be fully priced in advance. At year end the deposit is trued up against the adjusted premium, calculated from the actual bordereaux. A minimum premium is a floor beneath that adjustment: however small the actual book turns out to be, the reinsurer is guaranteed at least the minimum.

Deposit premium is a cash-flow mechanism, not a pricing one — it exists so the reinsurer is not carrying a full year of exposure against an unpaid balance, and is typically paid in equal instalments, often quarterly.
The minimum premium protects the reinsurer against a book that shrinks far below plan; without one, a cedent that stops writing business mid-year could leave the reinsurer having provided a full year of capacity for almost nothing.
At adjustment, the cedent pays the shortfall if the adjusted premium exceeds the deposit already paid, or the reinsurer returns the excess if the deposit was too high — subject always to the minimum floor.

Final premium = max( Minimum premium, Rate × Actual subject premium )

The deposit already paid is then trued up to whichever of the two is larger.

Worked example

A treaty deposits $500,000 a quarter — $2.0M for the year — against an estimated $2.0M premium. The actual book comes in larger than planned, adjusting to $2.35M; the cedent owes a further $350,000 at year end.

Scenario · figures in USD

Three years against the same minimum

A quota share treaty is rated at 15% of OGPI with a minimum and deposit premium of $1.8M, paid in equal quarterly instalments. OGPI varies considerably across three renewal years.

Minimum and deposit premium	$1.8M
Rate	15% of OGPI
Year 1 — OGPI $14.0M	Adjusted premium $2.10M — cedent pays $300,000 more
Year 2 — OGPI $12.0M	Adjusted premium $1.80M — exactly the minimum, no balance moves
Year 3 — OGPI $9.0M	Formula gives $1.35M, floored at the $1.8M minimum
Year 3 effective rate on actual OGPI	20.0%

So whatThe minimum only ever costs the cedent money — it can raise the final premium above what the rate alone would produce, but it can never lower it. Year 3 shows exactly that: a shrinking book does not shrink the bill below the floor.

Check your understanding

A treaty's adjusted premium formula produces a figure below the agreed minimum premium. What does the cedent actually pay?

The minimum premium — the floor always wins. The minimum is a hard floor. Whatever the rate formula produces, the cedent never pays less than the agreed minimum.

Why is deposit premium paid in instalments during the year rather than as one lump sum at the end?

It gives the reinsurer cash flow through the year it is already on risk, rather than an unpaid balance for a full year. The reinsurer is on risk from day one of the treaty — deposit instalments mean it is also being paid from close to day one, rather than waiting a full year for a single settlement.

Word problem

A treaty is rated at 18% of OGPI with a minimum and deposit premium of $2.4M, paid quarterly. OGPI for the year comes in at $11.5M. Calculate the adjusted premium, compare it with the minimum, and state the balance due at adjustment — including its sign, cedent owes more or is owed a return.

Show a hint

Calculate the rate-based premium first, then compare it against the minimum before working out which way the balance moves.

Reveal the worked answer

Rate-based premium = 18% × $11.5M = $2.07M
Compare with the minimum premium of $2.4M — the minimum is higher
Final premium = the minimum, $2.4M
Deposit already paid during the year = $2.4M (four instalments of $600,000)
Balance at adjustment = $2.4M − $2.4M = nil — no cash moves either way

The rate alone would have produced $2.07M, but the $2.4M minimum is higher and wins, so the final premium stays exactly at what was already deposited — no balance moves. The cedent has effectively paid a 20.9% rate on the $11.5M it actually wrote, purely because the book came in lighter than the minimum assumed.