No. of Points to Note for Promiseland's Capacity and Cessions
The flexible of surplus treaties is a significant advantage for Promiseland. It does not pose a practical consideration, however, and that is the difference between the capacity offered by a treaty and the amount of risk which is not normally involved until the first surplus has been filled to capacity.

Calculation of Trust Alliance’s share of the First Surplus Treaty
The difference between capacity of an arrangement (how much risk could be managed) and the actuality of placement is illustrated in the below example:

                          
Risk 2: Veteran’s Hospital in Puli
For Veteran’s Hospital risk, Promiseland could accept up to NT$ 16m. This would be apportioned as follows:
                                                                                                          NT$
                                      Promiseland’s retention                                2m
                                      First surplus (five times retention)               10m
                                      Second surplus (within twice retention)         4m
                                                                                                          16m
                                      Trust Alliance will be liable for:
                                      0.5% X $10m = $50,000 

There is a common misconception: A treaty is split into sections or the number of lines that relates to the number of reinsurers involved.

This is not true because for e.g. a five-line treaty is simply an agreement whereby the treaty accepts up to five times the retained amount on a risk. It is not split into five elements or units, some of which are used and some not.

The treaty is a single ‘pool’ of available capacity to which cessions are made of greater or lesser amounts as needed by the cedant.
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                                                                           Promiseland's Capacity and Cessions

                                Promiseland's retention      % of risk            Cession to               % of risk to        Cession to         % of risk to
Risk   Sum Insured          1 line: $2m                     retained        1st surplus (5 lines)       1st surplus        2nd surplus        2nd surplus

  1         $1.8m                    $1.8m                              100%                    -                                  -                       -                         -
  2         $2.4m                    $2m                               83.33%                   $0.4m                     16.67%                   -                         -
  3         $4m                       $2m                                    50%                  $2m                            50%                   -                         -
  4         $10m                     $2m                                     20%                 $4m                            40%                  $4m                    40%