Definition:Per-risk reinsurance
🔑 Per-risk reinsurance is any reinsurance structure — whether proportional or non-proportional — designed to limit a ceding insurer's exposure on an individual risk basis rather than on an aggregate or event basis. In quota share or surplus share treaties, it means the sharing percentages or cession amounts are applied risk by risk; in excess-of-loss treaties, the retention and limit attach to losses arising from a single insured risk. The concept is foundational in property and casualty underwriting, where individual policies can carry widely varying exposure sizes.
⚙️ Under a per-risk surplus share treaty, for example, the carrier might retain the first $1 million of exposure on each risk and cede the excess to reinsurers up to a multiple of that retention. A $5 million building would see $1 million retained and $4 million ceded; a $500,000 building would be retained entirely. This mechanism lets the carrier keep manageable exposures net while still being able to issue policies on larger assets. In contrast, a per-risk excess-of-loss treaty operates on actual losses rather than on sums insured, paying out only when a single risk's claim breaches the attachment. Both flavors serve the same strategic purpose: controlling the volatility that any one risk can inject into the carrier's results.
💡 The practical value of per-risk reinsurance becomes clear in capital planning and regulatory analysis. Carriers use it to manage their probable maximum loss on individual accounts, maintain compliance with risk-based capital requirements, and present a stable loss ratio to rating agencies and investors. Without per-risk protection, a primary insurer writing heterogeneous account sizes would face dramatic swings in net results whenever a large risk produced a significant loss. In treaty negotiations, the definition of what constitutes a single "risk" — one building, one location, one policy — is carefully specified because it determines when and how the reinsurance responds.
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