Quota Share
A proportional reinsurance arrangement where the cedent and reinsurer share premiums and losses at a fixed percentage.
What It Is
Quota share is a form of proportional reinsurance where the cedent (primary carrier) and the reinsurer share all premiums and losses within a defined class of business at a fixed percentage. For example, in a 60/40 quota share, the cedent retains 60% of the premium and 60% of all losses, while the reinsurer receives 40% of the premium and pays 40% of all losses. The split applies to every policy within the treaty's scope, regardless of size.
The reinsurer pays the cedent a ceding commission, typically 25-35% of the ceded premium, to compensate for the cedent's acquisition costs (commissions paid to agents and brokers) and administrative expenses in underwriting and servicing the policies. The ceding commission is often the most negotiated element of a quota share treaty because it directly impacts the cedent's profitability on the retained portion.
Quota share treaties serve several purposes for carriers: they reduce net premium and loss volatility, free up surplus capacity to write additional business, provide an immediate source of commission income, and allow newer or smaller carriers to build a book of business with limited capital. The trade-off is that the cedent gives up a fixed share of profitable business along with unprofitable business.
Why It Matters for Brokers
Quota share reinsurance affects brokers indirectly through its impact on carrier pricing, capacity, and financial strength. A carrier that increases its quota share cession has more capacity to write new business but retains less premium per policy. Conversely, a carrier reducing its quota share retains more premium but needs more surplus to support the larger net retention. These dynamics influence how aggressively carriers compete for business.
Real-World Example
A startup E&S carrier begins writing commercial property with $25M in surplus and a 75% quota share treaty. The carrier can write up to $100M in gross premium, ceding $75M to the reinsurer and retaining $25M. The reinsurer pays a 32% ceding commission on the ceded premium ($24M), which covers most of the carrier's operating expenses. As the carrier builds a profitable track record, it reduces the quota share to 50%, retaining more profit but assuming more risk.
Common Mistakes
- 1Not understanding that a carrier's large quota share cession means much of the risk is actually sitting with a reinsurer, whose financial strength should also be evaluated.
- 2Ignoring changes in a carrier's quota share program at renewal time, which can signal shifts in the carrier's capacity and competitiveness.
How brokerageaudit.com Handles This
brokerageaudit.com includes carrier financial profile data that notes known reinsurance structures, helping brokers assess the true risk-bearing capacity behind each carrier's ratings and policy commitments.