Experience the power of Artificial Intelligence (A.I)
Chat with our super-intelligent A.I model and ask it anything about insurance and related products.
Looking to Get Insured?
What is Quota Share Reinsurance? (Meaning, Definition & Advantages)
A quota share reinsurance treaty essentially means that a reinsurance company will only cover a certain quota of the assets of an insurance company. For instance, a reinsurance company will agree to cover only 25% of the health insurance policies of an insurance company (the ceding company). The remaining 75% of the asset is not covered by the reinsurance company.
That being said, the other percentage of the asset can be covered by other reinsurers. For instance, one reinsurance company will cover 25% of the health insurance policies, and another reinsurance company may agree to cover the other 75% of policies, thereby covering all health insurance policies of an insurance company.
A quota share reinsurance agreement is generally undertaken when the assets of the insurance company are large and cannot be covered by a single reinsurance company. An example of quota share reinsurance was when Warren Buffett’s Berkshire Hathaway entered into a 20% quota share reinsurance agreement with Australian insurance company IAG. To understand the concept of quota share reinsurance, you will first need to understand the concept of reinsurance.
Let us now talk about the advantages and disadvantages of quota share in reinsurance.
Advantages and Disadvantages of Quota Share in Reinsurance
Advantages | Disadvantages |
Transfer of risk: Through quota share reinsurance, the assets (insurance policies) of the ceding company gets covered by a reinsurance company, thereby resulting in a transfer of risk from the ceding company to the reinsurance company. | Cumbersome: A quota share reinsurance policy is slightly more difficult to manage compared to a non-quota share reinsurance agreement, this is simply due to that fact that a ceding company will effectively need to manage multiple quota sharing agreements. |
Stability: Quota sharing reinsurance results in increasing the stability of the ceding company, as their assets are covered in the event of various types of default. | Lesser profits: A ceding company will need to pay a premium to the reinsurer, this premium payment obligation of the ceding company will lead to lesser profits. This is however one of the most important and necessary expenses of an insurance company. |
Indemnification of ceding company: This the fundamental advantages of quota sharing as indemnification leads to security of the ceding company. |
Example of Quota Sharing agreement
Mentioned within is an example of a quota sharing reinsurance agreement.
A 100% quota sharing reinsurance agreement on the SEC website.
Author Bio
This article is written by Team InsuranceLiya.com, an independent website that writes about insurance, finance, health, and more. Our writers have a wealth of knowledge, experience, and degrees in the fields of insurance, finance, economics, and beyond.
Related articles