How are premiums and losses handled in pro rata reinsurance?

In pro rata reinsurance, premiums and losses are shared proportionately between the primary insurer and the reinsurer. This arrangement means that both the premiums collected from the insureds and the losses incurred from claims are distributed in accordance with the agreed-upon percentage that each party holds in the insurance agreement.

For example, if the primary insurer retains 60% of a policy, then it would also retain 60% of the premiums and be responsible for 60% of the losses. Conversely, the reinsurer would take on 40% of the premiums and losses. This proportional sharing aligns the interests of both parties, as each bears a measurable level of risk and reward based on their respective shares.

By distributing the financial responsibilities in this way, pro rata reinsurance helps stabilize the insurer’s financial condition, as they do not face full exposure to high claims alone, thereby providing a buffer against large losses.