How does quota share reinsurance work and when is it used?

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AcadiFi · Accepted Answer

Quota share (QS) is proportional reinsurance where the cedent transfers a fixed percentage of every risk in a defined portfolio. If Ambergate Insurance writes $500M of homeowners premium and cedes 30% QS, the reinsurer receives $150M of premium, pays $150M of the ceded claims proportionally, and typically returns a ceding commission (say 28%) of $42M to cover acquisition and admin costs. The cedent's net retention is 70% of every loss from dollar one. QS is most commonly used to (1) grow top-line capacity without consuming capital, (2) smooth earnings in volatile new lines, (3) finance new product launches, and (4) manage regulatory capital ratios. Unlike excess of loss, QS does not concentrate retained risk on frequency — it shares severity and frequency equally. A 'sliding scale commission' ties the ceding commission to the ceded loss ratio, creating alignment. Variations include surplus share (ceding percentages vary by policy size) and modified coinsurance (modco) for life business where assets stay with the cedent. Drawbacks: the cedent gives up profitable business too, so QS dilutes underwriting margin. It's also expensive relative to XoL when catastrophe exposure is concentrated. Most large insurers blend QS with non-proportional layers for optimal capital efficiency.

How does quota share reinsurance work and when is it used?

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