13 October 2020 1 min read

What is a quota share treaty?

Reinsurance tutorials #5 • The Basics


What is a quota share treaty?

There are different types of Quota Shares, including those:

  • with a fixed % ceded on a specific Line of Business, for example all policies written by the companies in their Fire or in their Motor Departments 
  • with a fix % ceded on several Lines of business (LOB): Multiline Quota Shares treaties
  • with a variable % ceded depending on the size of the sum insured 
  • with a variable % ceded depending on the type of business within the same LOB

For instance, 10% cession on small (simple) Fire risks, 30% on Commercial risks, 50% on Industrial Risks, 80% on Industrial chemical plants.


What do quota shares bring? 


  • Sharing the risk, identity of interest which allows for trust, long term commitment
  • The volume of the premium ceded to the reinsurers is a temptation for them to offer a very good price to the insurance company
  • Very simple process and thus cost handling reduced 


  • Ceded Premium amount can be very big if the capacity you require is high 
  • Insurance company may cede risks and the premium they could keep without financial problems 
  • An unbalanced book with small and high sums insured will remain with the same imbalance 
  • Quota Shares treaties do not offer a protection against big claims, the same loss ratio remains (claims to premium), gross (before reinsurance) or net (after)   


Why do insurance companies use Quota Shares Treaties?


  • To cope with the solvency requirements from the Insurance Control Authority. Liabilities towards the insured are reduced to be more in line with Surplus Funds 
  • To start a new company or a new line of business. If they have low premium or experience and if their book is very volatile and uncertain, they will cede a high Quota Shares which will reduce over time with the growth of the book and the experience 
  • To protect against deviations of claims frequency. This could be only a few points of loss ratio, but on a large portfolio like Motor, it could have a substantial impact on the balance sheet 
  • When it is difficult to define a commitment per risk (credit), control the accumulations (Storm, Earthquake...)  or when the commitment is not expressed in Sum Insured (Unlimited, like Motor) 
  • To enjoy good conditions, commissions paid by the reinsurers higher than their acquisition costs while simultaneously reducing their commitments 





📺 More episodes to come... Subscribe now to receive them in advance before their public release! 📥