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4/4 M97/February 2018 Reinsurance

This type of treaty states the maximum which can be ceded in relation to any one risk. In the case of
States the maximum
which can be ceded incidents involving a recognisable and identifiable event, such as a hurricane, the reinsurer will have to
in relation to any pay the stated proportion of claims for every risk, the total cost of which could be enormous. Therefore,
one risk
it is common for quota share reinsurers to incorporate an event limit in the contract, which puts a cap on
the liability of the reinsurer for such single incidents irrespective of the total number of losses that
would otherwise fall to the treaty.
Refer to section F A cession limit may also be incorporated instead of or in addition to an event limit. This imposes a
for cession and
event limits maximum limit that can be ceded in respect of specified types of risk. It is intended to restrict the
reinsurer’s liabilities, as opposed to its losses, in respect of a particular geographical location.

A1B Use of quota share treaties

The use of quota share treaties is particularly appropriate in the following circumstances:
• A newly formed company needs a sufficiently large per risk capacity to enable it to attract business,
particularly in a market that has an excess of existing capacity. However, it may not have the capital
base to support the size of acceptances required, nor the experience or reputation to develop a
4 presence in an established market. A quota share treaty will provide operating capacity while enabling
Chapter the insurer to fix its net retention at a level that matches its capital base. The reinsurer would prefer a
quota share arrangement with greater opportunity to participate in the underwriting of each policy and
to obtain an understanding of how the new business would be handled. The reinsurer can also benefit
from diversification in its own inward portfolio by accepting business in a class in which the reinsurer
does not have expertise: it can be more cost-effective for the reinsurer to avail itself of the other
insurer’s expertise than to buy in or set up its own underwriting team. As the company grows, the
percentage of its retention can be increased which allows a certain amount of expansion within
existing arrangements. This also provides continuity in its reinsurance security which is important,
particularly in the first few years of a company’s development.
• Where the risks are homogeneous, or similar, and have relatively uniform sums insured as might be
found in a household account, quota share treaties are useful where volumes are high as the
administration of the reinsurance is relatively simple and cost-effective when compared to other types.
This is especially true if the type of business is written via a number of small branch offices or agents. Reference copy for CII Face to Face Training
The ease of operation of this type of reinsurance, again, may make quota share arrangements
attractive to new or small companies with staff of limited experience administering their reinsurance
programmes.

Question 4.1
An insurer wishes to cede a large number of bloodstock and home contents risks, all having a sum insured of
£50,000. Are these risks collectively homogeneous?

• In general, quota share treaties carry the highest percentages of ceding commission compared with
other types of proportional reinsurance arrangements. This can provide a welcome addition to the
cash flow of an insurer and may be a factor that influences their choice of reinsurance method.
• A company may wish to expand its portfolio of inwards reinsurance business but this may only be
achievable by giving some of its own business away through reciprocal exchanges. Quota share
treaties provide an efficient method of arranging such transfers.
Example 4.2
A Dutch reinsurer agrees a reciprocal 15% quota share exchange with a reinsurer writing similar private motor risks
in Indonesia. While matching profitability is more important than duplicating lines of business, the arrangement
described is deemed to be a suitable basis for each insurer to develop its book of inwards reinsurance business.

• An established insurer, together with its reinsurers, may have experienced a period or series of poor
results under other less all-embracing reinsurance arrangements. As a temporary expedient, a sign of
good faith and to seek to maintain its reinsurance capacity, a quota share treaty may be arranged to
restore the balance. With this type of reinsurance there can be no selection of the risks ceded to
reinsurers. Therefore, if the original account is profitable this may be a preferred method of retaining
the support of reinsurers.