Key Takeaways
- Fixed percentage of premiums and losses shared.
- Automatically applies to all policies in portfolio.
- Provides predictable risk reduction and capital relief.
What is Quota Share Treaty?
A quota share treaty is a proportional reinsurance agreement where the primary insurer cedes a fixed percentage of premiums, losses, and expenses from a portfolio of policies to a reinsurer, who assumes the same percentage of risk in return. This type of treaty provides consistent risk transfer and financial stability by automatically applying to all policies covered in the agreement.
Quota share treaties differ from facultative reinsurance, which involves case-by-case risk acceptance, as quotas are applied across an entire book of business without individual approvals.
Key Characteristics
Quota share treaties have distinct features that make them a preferred choice for predictable risk sharing.
- Fixed Percentage Sharing: Both premiums and losses are split in the same proportional amount, typically between 10% and 70%, simplifying accounting and forecasting.
- Automatic Application: The treaty applies to every policy within the specified portfolio, unlike obligatory reinsurance which is also automatic but can differ in scope.
- Ceding Commission: The reinsurer often pays a commission to the insurer to cover acquisition costs, improving the insurer's expense management.
- Proportional Risk Transfer: Risks and rewards are shared directly, contrasting with non-proportional methods such as excess-of-loss treaties.
How It Works
In a quota share treaty, the insurer transfers a set percentage of earned premium and associated claims to the reinsurer. For example, if the quota share is 40%, the reinsurer receives 40% of all premiums and pays 40% of all claims, regardless of the size or type of individual policies.
This proportional method ensures that both parties share profits and losses equitably, making it easier for insurers to manage capital and comply with regulatory requirements involving deferred acquisition costs and capital adequacy.
Examples and Use Cases
Quota share treaties are widely used in the insurance industry for various purposes, including risk management and new market entry.
- Airlines: Companies like Delta may use quota share treaties to stabilize insurance costs related to fleet and liability risks.
- Startups and New Ventures: New insurers often cede a high percentage of premiums, sometimes up to 90%, to reinsurers until they build sufficient experience and capital.
- Portfolio Management: An insurer ceding 30% of premiums and losses on property policies to balance exposure and improve solvency margins.
- Investment Strategy Alignment: Insurers may leverage quota share arrangements to support capital deployment strategies, complementing their holdings in large-cap stocks or bond ETFs.
Important Considerations
While quota share treaties provide predictable risk transfer, they require careful consideration of premium ceding and commission terms to maintain profitability. Insurers should evaluate the impact on their paid-in capital and loss experience to optimize treaty parameters.
Additionally, quota share agreements simplify administration but may reduce upside gains in years with low claims, necessitating a balanced approach in portfolio selection and reinsurer partnership.
Final Words
A quota share treaty spreads risk and stabilizes your portfolio by sharing premiums and losses at a fixed percentage across all policies. To optimize its benefits, review different treaty terms and run scenario analyses with your risk and financial teams.
Frequently Asked Questions
A Quota Share Treaty is a proportional reinsurance agreement where the primary insurer transfers a fixed percentage of premiums, losses, and expenses from every policy in a portfolio to a reinsurer, who assumes the same percentage of risk. This helps the insurer reduce risk and gain financial stability.
In a Quota Share Treaty, both the insurer and reinsurer share premiums, claims, and expenses in an agreed fixed percentage, such as 40%. For example, if the reinsurer’s share is 40%, they receive 40% of premiums and pay 40% of claims, regardless of individual policy size.
Quota Share Treaties provide predictable risk reduction, capital relief, and financial stability by automatically covering all policies in the portfolio. They also simplify administration since the sharing applies proportionally to every policy without needing individual approvals.
Unlike excess-of-loss reinsurance, which covers losses above a certain amount per claim, Quota Share Treaties share a fixed percentage of all premiums and losses across every policy. This proportional sharing results in a more predictable risk and profit distribution.
The ceding commission is paid by the reinsurer to the insurer to help cover acquisition and administrative costs. This commission offsets some expenses the insurer incurs when writing and managing the policies included in the treaty.
Yes, the quota share percentage can vary depending on the risk type or portfolio segment. For example, an insurer might cede 10% on simple fire risks and 30% on more complex risks, allowing tailored risk sharing.
Accounting is straightforward because premiums and losses are split proportionally between the insurer and reinsurer. This proportional method makes it easier for insurers to forecast and manage their books of business effectively.
