A form of reinsurance that enables a cedant to increase its statutory surplus by the amount of the ceding commission in the reinsured unearned premium reserve. Surplus relief arises because statutory accounting requires insurers and reinsurers to charge immediately all acquisition costs to the accounting period in which the business is written, even when the premium is unearned at the end of the period. Referred to as pre-paid acquisition costs in the unearned premium reserve, or the equity in the unearned premium reserve.
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UK: Cedant and reinsurer share the risk in agreed proportions. The cover applies to future and current years. Reinsurance commission is on a sliding scale starting with 30 per cent commission for a loss ratio of 70 per cent. For every loss ratio change of 1 per cent, the commission changes by 1 per cent. A commission that increases with the loss ratio helps the cedant when it is most needed. If the cedant has an expense ratio of 30 per cent then the cedant will have an underwriting result of zero regardless of the actual loss ratio for the year. This improves the solvency margin.