What is a shared quota treaty?
A shared share treaty is a prorated reinsurance contract in which the insurer and reinsurer share premiums and losses according to a fixed percentage. Share-share reinsurance allows an insurer to retain part of the risk and premium while sharing the remainder with an insurer up to a predetermined maximum coverage. In general, it is a way for an insurer to boost and preserve part of its capital.
- A shared fee treaty is used when an insurer wants to free up cash flow to be able to write more policies.
- A share-share treaty reduces financial risk for the primary insurer.
- These types of treaties are enacted when an insurer wishes to diversify its risk and is in a position to obtain less profit from a premium in return.
Understanding quota-sharing treaties
When an insurance company writes a new policy, the insured pays a premium. In return, he undertakes to indemnify the insured up to the coverage limit. The more policies an insurer writes, the more its liabilities will grow and, at some point, it will be left without the ability to write new policies.
To free up capacity, the insurer can assign part of its liabilities to a reinsurer through a reinsurance contract. In exchange for assuming the responsibilities of an insurer, the reinsurer receives a portion of the policy premiums.
A shared share treaty is a reinsurance agreement in which the insurer cedes a portion of its risks and premiums up to a maximum dollar limit. Losses above this limit are the responsibility of the insurer, although the insurer may use an excess loss reinsurance contract to cover losses that exceed the maximum for policy coverage.
Some share-share treaties also include per-occurrence limits that restrict the amount of losses a reinsurer is willing to share per occurrence. Insurers are less willing to accept this type of arrangement because it can lead to a situation where the insurer is responsible for most of the losses resulting from a particular occurrence of a hazard, such as a catastrophic flood.
Quota-sharing treaties are a form of proportional reinsurance, as they grant the reinsurer a certain percentage of a policy.
How shared quota treaties work
Think of a quota-sharing treaty as giving away a portion of an insurer’s withholding. In return, the insurer manages to increase its acceptance capacity with automatic coverage.
A quota-sharing treaty reduces financial exposure to adverse claims fluctuations. The assignor may continue to participate in the underwriting proceeds at some negotiated percentage, even though he has reinsured the business and has access to the outside expertise of a professional reinsurer.
Consider an insurance company looking to reduce its exposure to liabilities created through its underwriting activities. Enter into a shared installment reinsurance contract. The contract makes the insurance company retain 40% of its premiums, losses and coverage limits, but cedes the remaining 60% to a reinsurer. This treaty would be called a 60% quota treaty because the reinsurer is assuming that percentage of the insurer’s liabilities.