quota share reinsurance

The simplest way to share risk is to split everything down the middle — or by any fixed fraction. Quota share reinsurance is exactly that: the cedant and reinsurer agree on a single percentage, and that percentage applies to every policy in the covered book, both the premiums coming in and the claims going out. If they agree on 40 percent, the reinsurer takes 40 percent of every premium and pays 40 percent of every claim, large or small. It is a true partnership share, like two people who own a rental property forty-sixty and split both the rent and the repair bills in those proportions.

Because it is proportional, the split is identical on premium and on loss: there is no threshold, no clever carve-out, no minimum claim size. On a 10,000 claim with a 40 percent quota share, the reinsurer pays 4,000; on a 1,000,000 claim it pays 400,000; on a year with no claims it simply keeps its 40 percent of premium. The cedant typically receives a ceding commission back from the reinsurer to cover the costs of having acquired and serviced the business, since the cedant did all the selling work. Quota share reduces the size of the whole book proportionally — it shrinks the insurer's exposure and its premium together, in lockstep.

Quota share is the workhorse of proportional reinsurance and is especially common for new or fast-growing insurers, for entering an unfamiliar line, and for straightforward capital relief: ceding 40 percent of the book cedes roughly 40 percent of the risk, which frees up a corresponding chunk of required capital. Its honest limitation is that it gives away premium on the small, predictable claims just as much as on the rare large ones — it is not targeted at catastrophes. An insurer worried mainly about a single huge loss usually prefers non-proportional cover instead, which only responds above a chosen level rather than from the first dollar.