Quota Share Treaty Reinsurance

The costs of acquiring and handling the business, known as ceding commission, are deducted from the premium passed to the reinsurer who normally also agrees to pay an additional commission based on the profits of the treaty. By reducing the amount to which the captive is exposed from any one loss to a level commensurate with the captive's capital base, the captive does not face financial ruin in the event of a large individual loss.

Quota Share reinsurance is ideal for start-up portfolios where the experience is less predictable or for programs which have a higher degree of volatility but which over a period of time are profitable. New captives often may wish not to retain all the risk in the first year and often seek reinsurance on a quota share basis whereby a reinsurer pays the same proportion of losses that it receives in premium.

A 75.00% Quota Share Treaty describes an arrangement whereby a reinsurer pays 75.00% of all losses and is paid 75.00% of all premiums after commissions and expenses. If a 75.00% quota share is placed and the fronting company retains 10.00% the captive is left with 15.00% of the risk. Whilst it may lose out on profits its downside will be limited and if the fronting company requires collateral then that requirement is reduced.

Quota Share reinsurers often pay a profit commission on underwriting profits once a certain profit level has been reached. Quota share reinsurance protects policies underwritten during a specific period until expiry or renewal, regardless of when losses occur.