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A1D Disadvantages of quota share treaties
The disadvantages of quota share treaties are:
• Since a quota share involves the cession of all business within the retention pattern, large amounts of
income are ceded away. If the class of business is a profitable one for the insurer, this could be to its
detriment.
• A quota share treaty is inflexible. The insurer cannot choose to vary its retention risk by risk and select
an amount below which it would retain the risk.
• If the risk does not fall entirely within the scope or capacity of the treaty arrangements, the insurer
must resort to the facultative method of reinsurance or retain the risk net.
• Where a risk falls within the scope of the treaty arrangements, the company is bound by the treaty
terms. The insurer cannot alter the retention or its underwriting practice where these details form an
integral part of the treaty. It cannot deal with the risk in any other fashion; for example, it cannot make
a new relationship with a different reinsurer unless there is an agreement in the treaty that further
reinsurance can be sought and used for the benefit of the insured.
4 • The reinsurer has limited or no input in the underwriting practices of the insurer, yet is still required to
Chapter • A quota share treaty protection by itself still leaves an insurer vulnerable to natural catastrophe
share in the outcome of the underwriting result.

losses.

Example 4.4
Take for example a windstorm loss: an insurance company with a 40% quota share will reduce its overall loss
exposure by 40% but if 1,000 houses suffer an average of £10,000 damage the company will still face a net loss in
the region of £6m.

Reinforce
Before you move on to surplus treaties, make sure you are clear about the operation and use of quota share treaties.

A2 Surplus treaties Reference copy for CII Face to Face Training

As we have seen, one disadvantage of a quota share reinsurance arrangement is that the insurer has to
cede a proportion of all risks to the reinsurer, no matter how small. For example, an insurer might want
to retain all risks under £70,000 in its household account believing that the cumulative risk is not so
substantial compared to the premium cost. Since a quota share does not allow an insurer this option, it
would be interested in a type of reinsurance where it would be allowed to cede only those risks over a
certain size that are surplus to its retention. This is possible under a surplus treaty.
The insurer would agree to retain for its own account those amounts indicated in a table of limits which
attaches to and forms an integral part of the treaty.

Example 4.5
In reinsurance of a commercial property account, the insurer would retain the following amounts:

Factories £150,000
Warehouses £200,000
Retail Outlets £350,000
Offices £500,000
Miscellaneous £400,000

This means that until a sum insured exceeds the retention in a category, no risk is ceded to the
Capacity of a surplus
treaty is a multiple of reinsurance. The capacity of a surplus treaty is always a multiple of the insurer’s retention and is referred
the insurer’s retention to as ‘lines’. A line describes the monetary amount of the insurance company’s gross retention taken on
an original risk.