What Is a Quota Share Treaty?
A quota share treaty is a proportional reinsurance agreement where both the insurer and reinsurer share premiums and losses based on a fixed percentage. This arrangement allows the insurer to retain a portion of the risk and premium while transferring the rest to a reinsurer, up to a predetermined maximum coverage. Ultimately, it serves as a means for the insurer to bolster and safeguard its capital.
Key Takeaways
- Utilized to enhance cash flow for underwriting more policies.
- Reduces financial risk for the primary insurer.
- Diversifies risks and sacrifices some profit for premium.
Understanding Quota Share Treaties
When an insurance company issues a new policy, the policyholder pays a premium in exchange for coverage up to a specific limit. As the insurer underwrites more policies, its liabilities increase, potentially limiting its capacity to underwrite further policies.
To free up capacity, the insurer can transfer some liabilities to a reinsurer through a reinsurance treaty. In return for assuming these liabilities, the reinsurer receives a share of the policy premiums.
A quota share treaty involves the insurer ceding a portion of risks and premiums to a reinsurer, up to a predetermined dollar limit. Losses exceeding this limit become the insurer’s responsibility, with the option to secure excess of loss reinsurance for coverage.
Some quota share treaties set per-occurrence limits, restricting the reinsurer’s liability for losses from a single event. Insurers may be cautious with such agreements due to the potential for bearing a significant share of losses from major events like natural disasters.
Quota share treaties fall under proportional reinsurance, granting a reinsurer a specific percentage of a policy.
How Quota Share Treaties Work
Conceptualize a quota share treaty as the insurer relinquishing a portion of its retention. In return, the insurer gains increased underwriting capacity with automatic coverage.
A quota share treaty minimizes exposure to adverse claim fluctuations, allowing the cedent to share in underwriting gains while benefitting from the expertise of a professional reinsurer.
Imagine an insurance company seeking to reduce exposure to liabilities from underwriting. Through a quota share reinsurance contract, the company retains 40% of premiums, losses, and coverage limits, ceding the remaining 60% to a reinsurer. This arrangement constitutes a 60% quota share treaty, with the reinsurer assuming that proportion of the insurer’s liabilities.