Enhanced risk management, financial stability, and increased underwriting capacity are all benefits of reinsurance. A commonly used type of reinsurance is quota share reinsurance, which cedes a fixed percentage of risk and premiums to a reinsurance company.
How this reinsurance agreement can be beneficial to an insurer and reinsurer is mostly what we’ll talk about in this article. We’ll also discuss pertinent topics like how quota share reinsurance works and provide real-world examples of this type of reinsurance.
Quota share reinsurance is a type of proportional reinsurance agreement in which an insurer, aka the “ceding company” or “cedant” and a reinsurer or “assuming company” share premiums and losses.
In this setup, both parties agree to a fixed, pre-determined percentage for sharing the risk, premiums, and losses.
This means that for every policy covered by the agreement, both the premiums collected, and the claims paid are divided according to the agreed quota (hence the term “quota share”). This is regardless of the size or type of risk.
Quota share reinsurance is a straightforward proportional risk-sharing arrangement where the insurer and reinsurer split premiums and losses by a fixed percentage. The goal is to provide risk transfer, capital management, and financial stability.
The insurer cedes or transfers a set percentage of every policy within a defined portfolio to the reinsurer.
For example, in a 40 percent quota share agreement, the reinsurer receives 40 percent of all premiums and pays 40 percent of all claims; the insurer retains the remaining 60 percent.
Both premiums collected and the claims paid are split according to the agreed percentage. For instance, if the insurer or cedent collects $1 million in premiums and the quota share is 40 percent, the reinsurer receives $400,000 in premiums and is responsible for 40 percent of any claims. If a $100,000 claim is filed, the reinsurer pays $40,000 and the insurer pays $60,000.
The reinsurer typically pays the insurer a ceding commission, which helps cover acquisition and administrative costs.
Quota share treaties usually cover a homogeneous class of business (e.g., all homeowners’ or auto policies). The agreement is automatic: every policy written within the treaty’s scope is included, up to any specified limits.
In terms of their purpose and advantages, quota share reinsurance offers:
Quota share insurance has several features:
In quota share reinsurance, the insurer cedes a set percentage of every policy to the reinsurer, just like in the example above.
These are shared in the same proportion. If the insurer collects $1 million in premiums and the quota share is 40 percent, the reinsurer receives $400,000 in premiums and is responsible for 40 percent of any claims.
The insurer keeps the remaining percentage of both premiums and losses.
Let’s assume that an insurance company enters a 30 percent quota share reinsurance agreement.
If one policyholder files a claim for $100,000, here’s how the sharing of premiums and claims can be computed:
Keep in mind that a 30 percent quota share agreement in this case applies to all premiums collected and claims paid, regardless of the individual policy or claims paid. So, for every $1,000 in premiums collected, $300 goes to the reinsurer, and $700 stays with the insurer.
Insurance brokers should consider this reinsurance strategy as there are several benefits, but it also comes with drawbacks. Let's go over some of them:
Quota share reinsurance allows insurers to transfer a fixed percentage of all policy’s premiums and losses to the reinsurer. This proportional sharing makes it easy to forecast both income and potential claims and leads to more predictable financial results.
By ceding a portion of risk, insurers reduce their exposure to large or unexpected losses. This helps stabilize their balance sheets and maintain solvency, even in the event of catastrophic claims.
Transferring risk to a reinsurer can free up capital for the insurer. This is a valuable benefit, since the insurer can write more policies and grow their business without exceeding regulatory or internal risk limits.
Quota share agreements are straightforward to structure and administer. The fixed percentage approach simplifies accounting, reporting, and claims settlement for both parties.
By sharing risk with a reinsurer, insurers can diversify their exposure across different lines of business or geographic regions. This reduces the impact of adverse events in any one area.
Quota share reinsurance is especially beneficial for new or quickly expanding insurers as it helps them manage risk while building up their own capital base and underwriting experience. They can expand their business more rapidly without worrying about their bottom line.
Because the insurer cedes a fixed percentage of both premiums and losses, it also gives up a share of potential underwriting profits—even on low-risk, profitable policies. This can lower overall returns when loss experience is favorable.
Quota share reinsurance applies the same cession rate to all policies in the covered portfolio, regardless of individual risk quality. This means profitable, low-risk policies are ceded alongside higher-risk ones, which can be inefficient for the insurer.
Some primary insurers may insist on relying too heavily on quota share reinsurance, which can mask weaknesses in underwriting or pricing strategies. If market conditions change or the reinsurer becomes less willing to share risk, the insurer may be exposed to unexpected volatility.
Being over-dependent on quota share insurance may cause some clients or brokers to ignore the other more common forms of reinsurance that can work as well if not better for certain clients and situations.
The fixed-percentage structure of a quota share treaty lacks flexibility to adjust for changing risk profiles or market conditions. Insurers cannot selectively cede only high-risk policies, which may be possible with other forms of reinsurance.
Although quota share is simpler than some alternatives, it still requires careful monitoring, regular reviews, and clear documentation. This is to ensure alignment with financial goals and compliance requirements.
To show how this popular form of reinsurance works in practice, we compiled some real-world examples of quota share reinsurance agreements and found three usage cases.
The agreement enabled American Family to continue providing coverage to policyholders while minimizing risk and stabilizing financial results.
Vesttoo, a company that connects insurance with investors, renewed a $120 million quota share reinsurance deal with a top Lloyd’s syndicate. This agreement covers several types of long-term insurance policies in North America.
This shows how Lloyd’s syndicates use quota share reinsurance to get more capital and better manage their risks across different insurance portfolios.
Back in 2023, Lemonade, Inc., a US-based insurtech company, entered a quota share reinsurance agreement with a panel of highly rated global reinsurers. Under this program, Lemonade cedes 75 percent of its premium and related losses to these reinsurers. This arrangement, renewed and expanded in 2021, includes Munich Re, Swiss Re, and Hannover Re among others.
Recently, Lemonade renewed its quota share treaties but reduced its ceded part of the business from 55 percent to 20 percent.
As it continues with its quota share program, Lemonade continues to manage risk, stabilize earnings, and free up more capital for growth. Reinsurers, meanwhile, gain access to Lemonade’s growing portfolio of homeowners, renters, and pet insurance policies.
Quota share reinsurance is one of the two forms of proportional treaty reinsurance agreements. The other is surplus share reinsurance. Surplus share reinsurance has several identical qualities to quota share reinsurance. Here’s how they compare:
|
Feature |
Quota share reinsurance |
Surplus share reinsurance |
|---|---|---|
|
Type |
Proportional |
Proportional |
|
Risk sharing |
Fixed percentage of every policy is ceded to reinsurer |
Only the portion of risk above the insurer’s retention is ceded (the “surplus”) |
|
Premium sharing |
Same fixed percentage of premiums ceded as risk |
Only premiums related to the surplus portion are ceded |
|
Loss sharing |
Same fixed percentage of losses ceded as risk |
Only losses related to the surplus portion are ceded |
|
Application |
Applies equally to all policies in the covered portfolio |
Applies only to policies that exceed the insurer’s retention; larger policies cede more risk |
|
Best for |
Homogeneous portfolios (e.g., personal auto, homeowners) |
Portfolios with varying policy sizes (e.g., commercial property) |
|
Flexibility |
Low – same cession rate for all policies |
High – cession rate varies by policy size |
|
Administration |
Simple – easy to calculate and account for |
More complex – requires calculation of surplus for each policy |
|
Insurer’s retention |
Fixed percentage retained for all policies |
Fixed retention amount; only surplus above this is ceded |
|
Profit sharing |
Insurer gives up a share of profits on all policies |
Insurer retains all profits on policies within retention |
In summary, quota share reinsurance is simple and applies the same percentage to every policy, making it ideal for uniform portfolios. Meanwhile, surplus share reinsurance is more flexible and efficient for portfolios with a mix of small and large policies. This is because only the excess amount above a set retention is shared with the reinsurer.
What about quota share vs. excess-of-loss insurance? Here's a comparison, highlighting their differences:
|
Feature |
Quota share reinsurance |
Excess-of-loss reinsurance |
|---|---|---|
|
Type |
Proportional |
Non-proportional |
|
Risk sharing |
Fixed percentage of every policy is ceded to reinsurer |
Reinsurer only pays when losses exceed a set threshold (retention or attachment point) |
|
Premium sharing |
Same fixed percentage of premiums ceded as risk |
Insurer pays a negotiated premium for coverage; premiums are not shared proportionally |
|
Loss sharing |
Same fixed percentage of losses ceded as risk |
Reinsurer pays only the portion of losses above the retention, up to a specified limit |
|
Application |
Applies equally to all policies in the covered portfolio |
Applies to individual large claims or aggregate losses exceeding the retention |
|
Best for |
Homogeneous portfolios (e.g., personal auto, homeowners) |
Catastrophic or large, unpredictable losses (e.g., natural disasters, large liability claims) |
|
Flexibility |
Low – same cession rate for all policies |
High – coverage can be tailored to specific risk layers |
|
Administration |
Simple – easy to calculate and account for |
More complex – requires tracking of losses against retention and limits |
|
Insurer’s retention |
Fixed percentage retained for all policies |
Fixed dollar amount retained per claim or event |
|
Profit sharing |
Insurer gives up a share of profits on all policies |
Insurer retains all profits unless a loss exceeds the retention |
When compared to excess-of-loss reinsurance, quota share reinsurance is simpler, spreading all risks and premiums by a fixed percentage. This makes quota share treaties ideal for portfolios with routine, predictable losses.
Quota share reinsurance can be a valuable tool for insurers, especially now that there are “property risks in areas with intensifying Nat Cat exposures,”according to Monica Ningen, Swiss Re’s CEO of US P&C reinsurance.
Excess-of-loss reinsurance is not as simple but has its merits. While non-proportional, it is better suited to protect against severe, infrequent losses. Excess-of-loss only covers the portion of claims that exceed a set threshold, making it valuable for catastrophic, or large, unexpected events.
Is this type of reinsurance the same across all markets or regions? Here’s an overview to keep handy, if you are a broker that works with multinational companies or clients. Note that these rules may not be true in the long term, so it’s advisable to stay updated with any regulatory changes in your market.
Quota share reinsurance can be advantageous for insurance companies, but brokers should only recommend this type of reinsurance with several important caveats.
Insurers can utilize quota share when they have large, uniform portfolios, are in growth phases, or are seeking to stabilize results and manage their capital efficiently. One emergent sector where quota share can work well is cyber insurance.
Note that quota share treaties are less suited for insurers whose portfolios have highly variable or catastrophic risks. In this case, non-proportional reinsurance may be more appropriate.
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