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Reinsurance Basics for Small-Amount, Short-Term Insurers — Treaty Types, Ceding Commission and Comparing Terms
Reinsurance basics for Japan's small-amount, short-term insurers: regulatory constraints, why reinsurance is used, treaty types (quota share, excess of loss, etc.) with worked examples, ceding commission, what to compare, and how renewals proceed, based on public material from the FSA, the Local Finance Bureau and reinsurers.
Japan's small-amount, short-term insurance business was introduced in April 2006 and writes only policies with small sums insured and short terms. As the business grows, how much risk to keep becomes a management issue, and reinsurance is the tool for answering it. This article reviews the regulatory constraints and then sets out the types of treaty reinsurance and how to read their terms, based on public material from the Financial Services Agency (FSA), the Local Finance Bureau and reinsurers.
Main constraints on small-amount, short-term insurers
| Item | Content |
|---|---|
| Maximum policy period | 1 year for life and medical; 2 years for non-life |
| Maximum sum insured (examples) | JPY 3 million for death, JPY 800,000 for medical, JPY 10 million for non-life |
| Annual premium income | JPY 5 billion or less |
| Investments | Limited to safe assets such as deposits and government bonds |
| Policyholder protection | Not covered by the Policyholders Protection Corporation; a deposit is lodged instead |
There is also a prompt corrective action system under which the supervisor can order measures if the solvency margin ratio, which shows the capacity to pay claims, falls below 200%. In a business model where it is hard to build up thick capital, reinsurance, which transfers part of the risk written, is a practical way to manage solvency.
What reinsurance is
Reinsurance is a mechanism by which an insurer has another insurer (a reinsurer) take on part or all of the liability it has written. Reinsurers describe it as "insurance for insurance companies". Passing risk to a reinsurer is called ceding, and accepting it is called assuming. The ceding insurer pays reinsurance premium and receives reinsurance recoveries when losses occur.
The reinsurance contract is separate from the insurance contract between the policyholder and the insurer (the primary contract). Even after ceding, the primary insurer (here, the small-amount, short-term insurer) remains liable to pay claims to policyholders. It is not released from paying policyholders even if it cannot recover from the reinsurer.
Decide the purpose first
The type of reinsurance depends on why you are ceding. If you gather quotes without a clear purpose, there is no basis for comparing terms. For small-amount, short-term insurers, the three most common purposes are:
- Solvency: ceding to ease the capital burden that grows as the business grows.
- Stable results: keeping profit and loss from swinging sharply even if losses cluster in a particular year.
- Large losses and accumulation: protecting against a single disaster or event that hits many policies at once.
Contract types: facultative and treaty
Facultative reinsurance cedes policies one by one, while treaty reinsurance automatically cedes all policies that meet terms agreed in advance. Treaty reinsurance usually suits small-amount, short-term insurance, which handles many small policies.
How liability is shared
| Type | How it works | Main purpose | Points to note |
|---|---|---|---|
| Quota share (proportional) | Premium and claims are shared in a fixed percentage | Solvency; launch phase of a new product | Premium is ceded at the same percentage in profitable years too, so the cession rate and ceding commission drive results |
| Surplus (proportional) | Only the amount above the retention per policy is ceded | Smoothing when sums insured vary by policy | Limited use for small-amount, short-term insurance, where maximum sums insured are small |
| Excess of loss (XoL, non-proportional) | The reinsurer pays the part of a loss per event or per disaster above a set amount | Large losses and accumulation from disasters | Check the retention (deductible), the reinsurance limit and the reinstatement terms |
| Stop loss (non-proportional) | The reinsurer pays the part of the annual loss ratio above a set level | Stable annual results | Few reinsurers write it; terms are negotiated individually |
In practice, a program combines several types, for example quota share for solvency with excess of loss on top of the retained share.
Two types in numbers
Quota share example
Suppose annual premium income is JPY 1 billion, the cession rate is 50% and the ceding commission rate is 30%.
| Item | Amount |
|---|---|
| Reinsurance premium paid to the reinsurer (JPY 1 billion × 50%) | JPY 500 million |
| Ceding commission received from the reinsurer (JPY 500 million × 30%) | JPY 150 million |
| Recoveries if annual claims are JPY 600 million (JPY 600 million × 50%) | JPY 300 million |
Because premium and claims are split in half with the reinsurer, the amount of risk kept is halved and the solvency burden is lighter. On the other hand, half of the profit in good years also goes to the reinsurer.
Excess of loss example
Suppose the retention per disaster is JPY 50 million and the reinsurance limit is JPY 200 million.
| Loss per disaster | Retained | Paid by reinsurer |
|---|---|---|
| JPY 30 million | JPY 30 million | JPY 0 |
| JPY 150 million | JPY 50 million | JPY 100 million |
| JPY 300 million | JPY 50 million + JPY 50 million above the limit | JPY 200 million |
* Both are illustrations of the mechanism and do not indicate actual rates or commission rates.
Losses in a normal year are retained, and the reinsurance responds only when a large disaster occurs. Losses above the limit come back to the insurer, so you need to check that the limit is enough for the largest loss you expect.
What to compare
Ceding commission and profit commission
In proportional reinsurance, the reinsurer returns part of the reinsurance premium to the ceding insurer as a ceding commission, so that the reinsurer also bears acquisition and administration costs. There may also be a profit commission that returns part of the profit when the ceded business performs well, or a sliding scale where the commission rate varies with the loss ratio. Compare the effective cost including these, not just the level of reinsurance premium.
Retention and limit
Check how much you retain and how much the reinsurer takes on. For excess of loss, it is also important whether cover can be reinstated for an additional premium after the limit has been used.
Reinsurer credit and spread
Reinsurance transfers part of the underwriting risk you hold, but creates credit risk on the reinsurer and the risk of not recovering. Checking reinsurers' financial strength and credit is therefore important. Also consider spreading the placement across several reinsurers rather than concentrating it in one.
Treaty wording
The scope of covered policies, exclusions, the definition of a loss (what counts as "one event" or "one disaster"), and how unexpired policies and unpaid claims are treated when the treaty ends are all set by the treaty wording. Check in the wording that losses covered by the primary policy wording are not excluded under the reinsurance treaty.
Accounting and reporting
Check the frequency of settlement for reinsurance premium and recoveries, the reporting format and the settlement currency. The administrative work recurs every period after binding, so make sure in advance that your organization can handle it.
Reinsurance market conditions also affect terms
Reinsurance terms depend not only on your own results but also on the reinsurance market as a whole. The FSA's insurance monitoring report notes that Japanese reinsurance renewals are concentrated in April each year, and that at the April 2025 renewal, Japanese reinsurance rates fell by around 15% overall. Because market terms change from year to year, it is important to look at the trend over several years when negotiating renewals.
From planning to binding
- Organize the data: summarize underwriting results by product, loss ratio trends, distribution of sums insured and accumulation of exposures.
- Design the program: consider the type, cession rate and retention to fit the purpose.
- Approach reinsurers: prepare the submission and approach several reinsurers. Overseas reinsurers need an English submission.
- Compare and negotiate terms: compare and negotiate reinsurance premium, commission, limits and treaty wording.
- Bind and renew: treaties are usually renewed annually. Each year's results feed into the next year's terms.
Start preparing for renewal several months before expiry. When approaching a new reinsurer, allow extra time for preparing the submission and answering questions.
For kyosai (cooperative insurance) organizations
Kyosai business is conducted under each organization's governing law, such as the Agricultural Cooperatives Act, the Consumer Cooperatives Act and the Small and Medium-Sized Enterprise Cooperatives Act, and the supervising ministry differs by law. Because the regulatory constraints differ from those on small-amount, short-term insurers, what reinsurance needs to cover, and to what extent, depends on the governing law, the supervising ministry's rules and the organization's financial position.
The approach described in this article still applies: decide the purpose of reinsurance, choose how liability is shared, and compare commission, limits and treaty wording. When a kyosai organization considers reinsurance, it should first confirm the treatment under its governing law and then follow the same steps.
The broker's role
On behalf of kyosai organizations and small-amount, short-term insurers, Credit Hills approaches reinsurers in Japan and overseas for treaty reinsurance, and compares and negotiates terms. We also prepare submissions and handle correspondence in English with overseas reinsurers. Reinsurance brokerage is generally paid by the reinsurers.
See our treaty reinsurance services →
Frequently asked questions
Q. We only want to check whether our current reinsurance terms are appropriate.
A. That is possible. We review your current terms and results against market levels. If your current terms are appropriate, we will recommend keeping them.
Q. Can we consult you before launching a new product?
A. Yes. Whether reinsurance support can be expected also affects product design, so it is easier to proceed if you consult us at the design stage.
Q. Once we cede to a reinsurer, are we released from liability to policyholders?
A. No. Reinsurance is a separate contract from the primary contract, and you remain liable to policyholders. This is why checking reinsurers' credit is important.