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?
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)
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
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