Define "proportional reinsurance" in insurance terms.

Proportional reinsurance is defined as an arrangement where the reinsurer shares a portion of both the premiums and the claims with the ceding insurer. This means that both the risks and rewards of the insurance portfolio are distributed between the primary insurer and the reinsurer in proportion to the agreed terms of the reinsurance contract. The reinsurer takes on a specified percentage of the risk, and in return, it receives a corresponding percentage of the premiums collected by the ceding insurer.

In this setup, when claims occur, the reinsurer is obligated to pay their share of those claims based on the same percentage. This type of reinsurance is beneficial because it allows the ceding insurer to manage its risk exposure while providing the reinsurer with a steady stream of premium income in exchange for taking on part of the underwriting risk.

Understanding this concept is crucial as it highlights the collaborative nature of risk management between insurers and reinsurers, which is a fundamental aspect of the insurance industry.