✅ What is a quota share treaty? | Reinsurance tutorials #5 • The Basics

Reinsurance tutorials #5 • The Basics

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.

Advantages:

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

Disadvantages:

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)

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