Quota Share Treaty

Quota Share Treaty — Definition and Overview

A quota share treaty is a proportional reinsurance agreement in which an insurer (the cedent) and a reinsurer agree to share premiums, losses, and policy limits at a fixed percentage. The reinsurer accepts a predetermined portion of each policy the insurer writes, and in return receives the same proportion of premiums. This arrangement helps insurers manage risk, improve cash flow, and expand underwriting capacity while retaining a portion of profits and responsibilities.

How It Works

• The insurer writes a policy and collects the premium.
• Under a quota share treaty, the insurer cedes a fixed percentage of that premium and the corresponding percentage of any losses and coverage limits to the reinsurer.
• The insurer retains the remaining percentage (its retention) and continues to service the policy.
• The treaty may include limits (for example, a maximum dollar amount or per‑occurrence cap) that restrict the reinsurer’s exposure.

Quota share treaties are automatic and apply to all covered policies within the treaty’s scope, enabling insurers to underwrite additional business without a one‑by‑one reinsurance negotiation.

Example

If an insurer enters a 60% quota share treaty:
* The reinsurer assumes 60% of premiums, losses, and policy limits.
* The insurer retains 40% and remains responsible for that portion.
* If a loss exceeds the treaty’s per‑policy or per‑occurrence limits, the excess must be handled by the insurer or by additional reinsurance (for example, an excess‑of‑loss treaty).

Benefits

• Frees up capacity and capital, allowing the insurer to write more policies.
• Reduces volatility from large or frequent claims by sharing losses.
• Provides access to reinsurer expertise, underwriting support, and stability.
• Allows the cedent to participate in underwriting gains proportional to its retained share.

Limits and Considerations

• Per‑occurrence or per‑policy caps can leave the cedent exposed to large losses from catastrophic events.
• Because the reinsurer only takes a fixed share, very large single losses can still result in substantial expense for the insurer if limits apply.
• Quota share treaties do not eliminate the need for other reinsurance forms; they are often combined with excess‑of‑loss arrangements to cover losses above treaty limits.
• Pricing, profit commissions, and administrative arrangements are negotiated and affect the net benefit.

When It’s Used

Quota share treaties are commonly used in property and casualty insurance, especially when an insurer wants to:
* Rapidly expand underwriting capacity,
* Stabilize results while building a book of business,
* Share risk on new or volatile lines without ceding whole classes of business.

Key Takeaways

• A quota share treaty is a proportional reinsurance contract sharing premiums and losses at a fixed percentage.
• It increases capacity and reduces financial exposure, while preserving a portion of risk and profit for the insurer.
• Treaties often include limits and are frequently used alongside excess‑of‑loss reinsurance to protect against catastrophic losses.

Bottom Line

Quota share treaties let insurers and reinsurers split premiums and liabilities according to a fixed share, enabling insurers to grow and stabilize their business while leveraging reinsurer capital and expertise. Properly structured, they balance capacity, risk sharing, and retained upside, but insurers must manage treaty limits and complement quota share cover with other reinsurance when needed.