Proportional CoversCore

Quota Share

Q: Under a 25% quota share, a $4,000 windscreen claim produces a reinsurance recovery of:

$1,000 — Quota share has no deductible. Every claim, however trivial, is shared in the fixed proportion — which is also why it generates so much administration.

Q: A reinsurer will break even on a 30% commission quota share at what gross loss ratio?

70% — Premium 100 − commission 30 leaves 70 for losses. Above a 70% loss ratio the treaty runs at an underwriting loss (before brokerage and internal expense).

Fixed percentage of everything

The reinsurer takes the same fixed share of every risk, every premium and every loss.

Open the interactive version → definition, quiz, structure diagram and progress tracking

Definition

Under a quota share, the cedent cedes a fixed percentage of every risk falling within the treaty — no selection, no variation. The reinsurer receives that percentage of the premium, pays that percentage of every loss, and returns a ceding commission to cover the cedent's acquisition costs.

The simplest treaty to administer and the easiest to explain to a regulator or a rating agency.
Excellent for capital relief and for supporting rapid growth; poor as protection, because it cedes small losses as willingly as large ones.
Frequently written with a per-risk or per-event event limit so the reinsurer can cap its catastrophe participation.

Reinsurer's share of any item = Quota share % × Item

The same percentage applies to sums insured, premiums, losses and reserves alike.

Worked example

A 40% quota share on a $50M motor book cedes $20M of premium; every $1M claim produces a $400,000 recovery, and every $2,000 claim produces an $800 one.

The structure diagram for this term is in the interactive version.

Scenario · figures in USD

A 40% quota share, seen from both sides

Kestrel Motor cedes 40% of a $50M book with a 32% ceding commission. Gross losses come in at $35M — a 70% loss ratio.

Gross written premium	$50M
Premium ceded (40%)	$20M
Ceding commission (32% of $20M)	$6.4M
Losses ceded (40% of $35M)	$14.0M
Reinsurer result: $20M − $14M − $6.4M	−$0.4M
Reinsurer combined ratio	102.0%
Cedent net premium	$30M
Cedent net losses	$21M

So whatAt a 70% loss ratio and a 32% commission, the reinsurer loses two cents on the dollar. Quota share economics are decided entirely by the gap between the loss ratio and 100% minus the commission.

Check your understanding

Under a 25% quota share, a $4,000 windscreen claim produces a reinsurance recovery of:

$1,000. Quota share has no deductible. Every claim, however trivial, is shared in the fixed proportion — which is also why it generates so much administration.

A reinsurer will break even on a 30% commission quota share at what gross loss ratio?

70%. Premium 100 − commission 30 leaves 70 for losses. Above a 70% loss ratio the treaty runs at an underwriting loss (before brokerage and internal expense).

Word problem

Halcyon Property writes $60M gross with its own expenses running at 30% of premium. It cedes 30% under a quota share with a 25% ceding commission. Gross losses are $42M. Does the treaty help or hurt the cedent's combined ratio?

Show a hint

Build the gross combined ratio first, then rebuild it net of the cession, remembering that the cedent's own expenses do not shrink when it cedes premium.

Reveal the worked answer

Gross combined = ($42M + $18M) ÷ $60M = 100.0%
Ceded premium = 30% × $60M = $18M; commission received = 25% × $18M = $4.5M
Ceded losses = 30% × $42M = $12.6M
Net premium = $42M; net losses = $29.4M
Net expenses = $18M incurred − $4.5M commission = $13.5M
Net combined = ($29.4M + $13.5M) ÷ $42M = 102.1%

It hurts — the combined ratio worsens by 2.1 points. The cedent gives away 30% of its premium but only recovers 25% of it in commission while still carrying a 30% expense load. Capital relief has a price, and here it is roughly $0.9M a year.