Reinsurance Impact on Combined Ratio: Gross vs Net Results

How Reinsurance Impacts the Combined Ratio: Reading Gross vs Net Results Correctly

Last reviewed: November 2026

Reinsurance impact on combined ratio is the difference between an insurer's underwriting ratio before reinsurance (gross) and after reinsurance (net). A quota share with a high ceding commission can make the net ratio look better than gross, while an excess of loss programme usually makes it look worse in quiet years and better in heavy loss years.

The direction of the change says little about whether reinsurance created value. A lower net combined ratio can come with a lower underwriting profit.

This guide is for CFOs, CUOs, chief actuaries, heads of reinsurance accounting and analysts. It explains how each type of reinsurance moves the ratio, shows a worked example and covers what IFRS 17 changes.

Key Takeaways

• The gross combined ratio shows underwriting quality; the net combined ratio shows the retained result after reinsurance.
• A quota share leaves the loss ratio unchanged but moves the expense ratio, depending on the ceding commission rate.
• A ceding commission above the cedent's own expense ratio can lower the net ratio while reducing profit.
• Excess of loss raises the net ratio in quiet years and lowers it in large loss years, reducing volatility.
• Reinstatement premiums reduce net premium in loss years and belong in the cost of the event.
• IFRS 17 presents reinsurance separately and does not define a combined ratio, so definitions must be checked.

How Does Reinsurance Impact the Combined Ratio?

Reinsurance changes all three parts of the calculation: premium, losses and expenses. The net effect depends on the type of cover and the year's loss experience.

Proportional reinsurance shrinks premium, losses and expenses in the same proportion, apart from the commission. Non-proportional reinsurance reduces premium every year but only reduces losses when a layer is hit.

The two families are compared in more depth in our guide to proportional vs non-proportional reinsurance.

How Are Gross and Net Combined Ratios Calculated?

The combined ratio is the loss ratio plus the expense ratio. Gross uses figures before reinsurance, and net uses figures after reinsurance.

Some insurers use written premium for the expense ratio. Always check which premium base sits under each ratio.

How Does a Quota Share Change the Ratio?

A quota share leaves the net loss ratio unchanged, because premium and losses are ceded in the same proportion. It moves the expense ratio up or down depending on whether the ceding commission rate is above or below the cedent's own expense ratio.

If the commission exceeds the cedent's expense ratio, the excess is sometimes called an overriding commission. The net expense ratio falls, and the net combined ratio improves.

The improvement is not the same as profit. The reinsurer still keeps its expected margin, so the cedent's underwriting result in currency terms usually falls.

How Does Excess of Loss Change the Ratio?

Excess of loss premium reduces net earned premium every year, but recoveries only reduce net losses when a layer is hit. The net ratio is therefore higher than gross in quiet years and lower in large loss years.

Reinstatement premiums add a further effect. They are deducted from net premium in the loss year, so part of the recovery is given back through the premium line.

How reinstatements affect earnings is explored in why reinstatement economics is an earnings issue.

Worked Example: Quota Share vs Excess of Loss

The example below is illustrative and simplified. All figures are in USD millions; the cedent's gross position is earned premium of 1,000, incurred losses of 620 and expenses of 300.

Quota Share: 30% Cession, 33% Ceding Commission

The net combined ratio improves by 1.29 points because the 33% commission exceeds the cedent's 30% expense ratio. Yet the underwriting result falls from 80 to 65, because the reinsurer keeps a margin of 15.

Excess of Loss: Cat Programme 250 xs 50, Premium 40, One Reinstatement at 100%

In the cat year, a 150 event exceeds the 50 retention by 100, which is recovered. The reinstatement premium is 100 ÷ 250 × 40 = 16.

The gross combined ratio swings by 15.00 points between the two years. The net ratio swings by only 6.92 points, from 95.83% to 102.75%.

The lesson for CFOs and boards: a better net ratio is not the same as a better result, and a worse net ratio in a quiet year is the price of stability. Judge each cover on its margin and its effect on volatility, not on the direction of the ratio.

The lesson for reinsurers: cedents and analysts may read a quota share commission as performance improvement. Commission terms deserve the same scrutiny as price, because they shape how the cedent's results are perceived.

How Does IFRS 17 Change the Picture?

Under IFRS 17, reinsurance contracts held are presented separately from insurance contracts issued, and the cost of reinsurance is not deducted from insurance revenue. That changes how a net combined ratio is built.

Paragraph 86 of IFRS 17, quoted in IFRS Transition Resource Group staff material, lets an entity present reinsurance income or expense as a single amount or as recoveries and an allocation of premiums paid. If presented separately, amounts not contingent on claims, such as some ceding commissions, reduce the premium paid, and the allocation of premiums is not shown as a reduction in revenue.

IFRS 17 does not define a combined ratio. Each insurer sets its own definition, often using insurance revenue as the denominator and adding the net result from reinsurance contracts held.

Applying that approach to the quota share above gives a different number from the traditional net ratio.

The 15 is the net expense from reinsurance held: ceded premium of 300, less commission of 99, less recoveries of 186. The same economics produce three different ratios, so read the definition before comparing insurers.

When Does Net Look Better or Worse Than Gross?

The direction of the gap depends on the cover and the year. The table maps common situations to the usual effect and how to read it.

Which Mistakes Lead to Misreading Net Results?

Most misreadings come from treating the net ratio as a pure performance measure. These seven errors are the most common.

How Should CFOs and Analysts Read Gross vs Net?

Read gross for underwriting quality, net for retained performance and the gap for reinsurance cost and dependence. A simple reconciliation makes the gap explainable.

Gross-to-Net Reconciliation

Which Questions Should Boards Ask?

• How much of the net ratio improvement comes from commission rather than underwriting?
• What is the ceded margin by treaty, in currency terms?
• How much did reinsurance reduce the volatility of the combined ratio over several years?
• Which combined ratio definition does management use, and is it consistent with peers?

Accurate ceded figures depend on correct treaty billing, as covered in billing the treaty correctly. For close-process controls, see the quarterly close for reinsurance.

What Does the Market Look Like for 2027?

Reinsurance pricing has softened through 2026, particularly on property catastrophe business. Lower XoL premiums narrow the gap between gross and net ratios in quiet years.

Softer markets also tend to bring richer proportional terms, including higher commissions. That can flatter net ratios, which makes the margin test in this guide more important, not less.

Checklist for CFOs and Heads of Reinsurance Accounting

Use this checklist before you publish or present gross and net results.

• The combined ratio definition and premium base are stated clearly
• Gross, net and the gross-to-net reconciliation are all presented
• Ceded margin is reported by treaty in currency terms
• Reinstatement premiums are shown as part of the event cost
• Prior-year recoveries are separated from current-year effects
• Disputed or ageing recoverables are disclosed separately
• The IFRS 17 presentation of reinsurance held is reconciled to the KPI
• Commissions, recoveries and reinstatements are calculated in a controlled system

For the last point, bordereaux reconciliation splits premiums and claims by reinsurer share and checks them against premium, claim and settlement records.

Key Terms

Combined ratio: The loss ratio plus the expense ratio. Below 100% indicates an underwriting profit.

Gross combined ratio: The combined ratio before reinsurance, using gross premiums, losses and expenses.

Net combined ratio: The combined ratio after reinsurance, using net premiums, net losses and expenses net of commissions.

Ceding commission: The amount a reinsurer pays a cedent on a proportional treaty to cover acquisition and administration costs.

Overriding commission: The part of a ceding commission that exceeds the cedent's actual expenses.

Ceded margin: Ceded premium minus ceding commission minus recoveries. It is the reinsurer's result on the cover.

Reinstatement premium: The additional premium paid to restore a layer's limit after a loss, usually pro rata as to amount.

Reinsurance contracts held: The IFRS 17 term for reinsurance a cedent buys, presented separately from insurance contracts issued.

Sources

• IFRS 17 Insurance Contracts, IFRS Foundation
• IFRS 17 TRG Agenda Paper 3 (September 2018): Commissions and reinstatement premiums in reinsurance contracts issued, IFRS Foundation