For proportional reinsurance, the reinsurance premium with be calculated as a proportion of the underlying insurance premium, which reflects the amount of risk transferred.
In addition, the reinsurer will pay the insurance company a proportionate share of the original costs of acquiring the business. This is called a ceding commission.
If the reinsurance turns out to be profitable a profit commission may also be paid.
For non-proportional reinsurance, reinsurers use two main methods of rating:
- exposure rating: which is based upon the sums insured exposed to a particular level of coverage
- experience rating; which is based on the estimated or projected loss experience
