Quota Share Reinsurance

Quota Share Reinsurance: An In-Depth Guide for U.S. Insurance Professionals

Quota share reinsurance is a fundamental form of proportional reinsurance widely utilized by property and casualty insurers in the United States to manage risk, optimize capital, and stabilize underwriting results. This article provides a detailed exploration of quota share treaties, explaining their structure, benefits, regulatory considerations, and practical applications, with embedded industry terms and long-tail keywords relevant to American insurers, brokers, and risk managers.

What Is Quota Share Reinsurance?

A quota share treaty is a type of reinsurance contract in which the primary insurer (cedent) cedes a fixed percentage of every insurance policy within a specified portfolio to the reinsurer. This means the reinsurer receives the same percentage of premiums and is responsible for the corresponding percentage of losses, including allocated loss adjustment expenses.

For example, under a 30% quota share agreement, if the insurer collects $10 million in premiums and pays $5 million in claims, the reinsurer receives $3 million in premiums and covers $1.5 million of the losses. This proportional sharing enables the insurer to free up capital and expand underwriting capacity while sharing risk.

How Quota Share Treaties Work in the U.S. Insurance Market

Quota share reinsurance is commonly used by property and casualty insurers in the USA to diversify their risk portfolios and reduce volatility. The agreement typically covers a homogeneous class of business, such as homeowners, commercial auto, or general liability policies.

The ceding insurer automatically cedes the agreed percentage of every policy written within the treaty’s scope, up to a maximum dollar limit. Losses exceeding this limit remain the insurer’s responsibility but can be further protected through excess of loss reinsurance.

The treaty contract defines:

• Cession Percentage: The fixed portion of premiums and losses ceded.
• Maximum Dollar Limit: The cap on the reinsurer’s liability per policy or occurrence.
• Retention: The insurer’s retained portion of risk.
• Ceding Commission: A fee paid by the reinsurer to the cedent to cover acquisition and administrative expenses.

Advantages of Quota Share Reinsurance Agreements

Quota share treaties offer several strategic benefits for American insurers:

• Capital Relief: By ceding a portion of premiums and losses, insurers reduce their net exposure, freeing statutory capital to underwrite additional business.
• Loss Stabilization: Sharing losses proportionally smooths the insurer’s loss experience, reducing earnings volatility.
• Portfolio Diversification: Enables insurers to manage concentration risk across geographic regions or lines of business.
• Administrative Efficiency: Automatic coverage of all policies within the treaty reduces underwriting and claims processing burdens.
• Risk Sharing: Facilitates collaboration between insurers and reinsurers, fostering long-term partnerships.

Regulatory and Compliance Considerations

In the United States, quota share reinsurance contracts must comply with state insurance department regulations and NAIC guidelines. Key regulatory aspects include:

• Accurate Reporting: Cedents must submit detailed bordereaux reports outlining premiums ceded and losses incurred.
• Contract Transparency: Clear documentation of treaty terms, including cession percentages and limits, is required.
• Solvency Requirements: Reinsurance arrangements impact the insurer’s risk-based capital calculations and reserve requirements.
• Ceding Commissions: Must reflect reasonable acquisition costs and comply with regulatory standards to avoid anti-rebating violations.

Practical Example: Quota Share in Action

Consider a regional insurer in the Midwest that writes $100 million in commercial auto premiums annually. To manage exposure and increase capacity, the insurer enters a 40% quota share treaty with a global reinsurer. The reinsurer receives $40 million in premiums and covers 40% of all losses.

During a severe hailstorm causing $30 million in claims, the reinsurer pays $12 million, significantly reducing the insurer’s net loss and preserving capital for future underwriting.

Frequently Asked Questions (FAQs)

Q1: How does quota share reinsurance differ from excess of loss reinsurance?
A: Quota share is proportional, sharing premiums and losses at a fixed percentage, while excess of loss covers losses above a retention limit.

Q2: Can quota share treaties include per-occurrence limits?
A: Yes, some treaties cap the reinsurer’s liability per event, which can affect risk retention strategies.

Q3: What is a ceding commission in quota share reinsurance?
A: It is a payment from the reinsurer to the cedent to cover acquisition and administrative expenses.

Q4: How does quota share reinsurance help with capital management?
A: By transferring a portion of risk and premiums, it frees up statutory capital, enabling insurers to write more business.

Q5: Are quota share treaties suitable for all lines of business?
A: They are ideal for homogeneous portfolios like personal auto or homeowners but less common for highly volatile or unique risks.

5 most active and largest reinsurance companies 

operating globally and significantly in the USA, with their key contact details for professional inquiries:

Munich Re (Munich Reinsurance Company)

Country: Germany
2022 Gross Premiums Written: ~$51.3 billion (global)
Overview: The world’s largest reinsurer, offering a full spectrum of reinsurance products including property & casualty, life & health, specialty lines, and risk solutions.
Headquarters:

• Address: Königinstraße 107, 80802 Munich, Germany
• Phone: +49 89 3891-0
• Website: www.munichre.com
  U.S. Office:
• Munich Re America
• Address: 555 College Road East, Princeton, NJ 08540, USA
• Phone: +1 609 243 4200

Swiss Reinsurance Company Ltd (Swiss Re)

Country: Switzerland
2022 Net Premiums Written: ~$22.9 billion
Overview: A global leader in reinsurance, Swiss Re provides property & casualty, life & health, and specialty reinsurance solutions, with strong emphasis on innovation and risk analytics.
Headquarters:

• Address: Mythenquai 50/60, 8002 Zurich, Switzerland
• Phone: +41 43 285 2121
• Website: www.swissre.com
  U.S. Office:
• Swiss Re America Holding Corporation
• Address: 175 King Street, Armonk, NY 10504, USA
• Phone: +1 914 828 8000

Berkshire Hathaway Reinsurance Group

Country: USA
2022 Net Premiums Written: ~$15.4 billion
Overview: Part of Berkshire Hathaway Inc., this group provides multi-line reinsurance including property, casualty, life, and specialty lines with a strong capital base and underwriting discipline.
Headquarters:

• Address: 3555 Farnam Street, Omaha, NE 68131, USA
• Phone: +1 402 346 1400
• Website: www.berkshirehathaway.com

Hannover Re

Country: Germany
2022 Net Premiums Written: ~$14.3 billion
Overview: One of the world’s largest reinsurance groups, Hannover Re offers property & casualty, life & health reinsurance, and specialty products with global reach and technical expertise.
Headquarters:

• Address: Karl-Wiechert-Allee 50, 30625 Hannover, Germany
• Phone: +49 511 5604-0
• Website: www.hannover-re.com
  U.S. Office:
• Hannover Reinsurance America, Inc.
• Address: 360 Hamilton Avenue, Suite 1200, White Plains, NY 10601, USA
• Phone: +1 914 872 4600

Lloyd’s of London

Country: United Kingdom
2022 Net Premiums Written: ~$10.7 billion
Overview: Lloyd’s is a marketplace of underwriters providing specialist insurance and reinsurance solutions globally, including a significant presence in the U.S. reinsurance market.
Headquarters:

• Address: One Lime Street, London EC3M 7HA, United Kingdom
• Phone: +44 20 7327 1000
• Website: www.lloyds.com
  U.S. Office:
• Lloyd’s America, Inc.
• Address: 280 Park Avenue, 9th Floor, New York, NY 10017, USA
• Phone: +1 212 302 6500

Conclusion

Quota share reinsurance remains a vital tool for U.S. insurers seeking to balance risk retention, capital efficiency, and portfolio diversification. By sharing premiums and losses proportionally, quota share treaties provide predictable risk transfer and foster strong reinsurer-cedent partnerships. Mastery of quota share treaty structures and regulatory compliance is essential for insurance professionals navigating today’s competitive and complex market.