Captive Insurance
An insurer owned by the businesses it covers, the forms it takes, and what separates a captive from simply retaining the risk.
Glossary
Quota Share Reinsurance
Proportional reinsurance where premium and losses are split by a fixed percentage, and what the ceding commission is paying for.
Quota share reinsurance is a proportional arrangement in which an insurer transfers an agreed percentage of covered business to a reinsurer. The reinsurer receives that share of the relevant premium and pays that share of covered losses, subject to the reinsurance contract.
If an insurer cedes 40% under a quota share, it generally retains 60% of the business within the arrangement. The percentages apply to the contract’s defined subject business, which may already reflect other reinsurance. Munich Re’s definition of quota share reinsurance.
How quota share works
The insurer buying reinsurance is the cedent, or ceding insurer. The percentage transferred is the ceded share, and the percentage kept is the retained share.
The agreement defines which policies or risks participate. It may cover a particular product, territory, underwriting period, or portfolio. It also specifies exclusions, limits, and the treatment of expenses and recoveries.
For a straightforward proportional arrangement:
Ceded premium = subject premium × ceded percentage
Reinsurer’s share of a covered loss = covered loss × ceded percentage
The calculation is simple once the correct subject amount is established. Applying a percentage to the wrong premium base or to a loss outside the treaty would produce the wrong result.
A worked quota share example
Consider a fictional insurer with a 40% quota share covering an eligible portfolio. Assume $1 million of subject premium and $600,000 of covered paid losses, with no other reinsurance, recoveries, taxes, or expense adjustments in the example.
| Item | Total | Insurer’s 60% share | Reinsurer’s 40% share |
|---|---|---|---|
| Subject premium | $1,000,000 | $600,000 | $400,000 |
| Covered paid losses | $600,000 | $360,000 | $240,000 |
The reinsurer receives $400,000 of premium before any ceding commission and bears $240,000 of the covered losses. The insurer retains $600,000 of premium and $360,000 of those losses.
The same percentage applies to each covered loss. A $10,000 claim produces a $4,000 reinsurance share, while a $100,000 claim produces a $40,000 share, assuming neither encounters a contractual limit or exclusion.
Quota share therefore shares ordinary claims as well as larger ones. It does not wait for an individual loss to cross an attachment point before the reinsurer participates.
What is a ceding commission?
A ceding commission is an allowance paid by the reinsurer to the ceding insurer. It commonly contributes toward the insurer’s acquisition and administration costs, since the insurer originates and services the business while sharing the premium.
For example, suppose the fictional contract above provides a commission equal to 25% of ceded premium:
Ceding commission = $400,000 × 25% = $100,000
The premium transfer after that commission would be $300,000. The commission does not change the stated 40% share of covered losses.
Commission terms can be fixed or adjustable. A sliding-scale commission changes according to an agreed formula, often linked to loss experience. Some contracts also include profit commission provisions. These mechanisms need to be read separately from the basic cession percentage. Munich Re’s reinsurance glossary on commission arrangements.
Why insurers use quota share
Sharing a defined portion of a portfolio can help an insurer support its underwriting capacity and reduce the amount of risk retained on its own balance sheet. It can also give a reinsurer a continuing participation in a new product or an established book.
The arrangement has a corresponding cost. The insurer gives up a share of premium and potentially profitable business, as well as transferring losses. A quota share should therefore be assessed using its full economics, including commission, expenses, and the quality of the reinsurance protection.
Munich Re identifies capacity, financial stability, and protection against adverse results among the purposes of reinsurance. The effect on an individual insurer depends on its portfolio and contract. Munich Re’s introduction to reinsurance.
Quota share versus excess of loss
Quota share divides covered premium and losses by a percentage. Excess-of-loss reinsurance instead responds to covered losses above a stated retention, up to an agreed limit.
For a separate fictional example, compare a 40% quota share with excess-of-loss protection of $400,000 above a $100,000 retention:
| Covered loss | Reinsurance recovery under 40% quota share | Recovery under $400,000 excess of $100,000 |
|---|---|---|
| $50,000 | $20,000 | $0 |
| $250,000 | $100,000 | $150,000 |
| $700,000 | $280,000 | $400,000 |
The two arrangements transfer different patterns of risk. The excess-of-loss column reaches its limit on the largest loss. This comparison assumes the contracts otherwise cover the loss and ignores additional conditions.
Is every quota share a treaty?
Quota share is commonly arranged as a treaty covering a defined book. The percentage-sharing principle can also be used in a facultative placement for an individual risk. Treaty or facultative describes the placement arrangement; proportional or non-proportional describes how risk is shared. Swiss Re’s introduction to reinsurance classifications.
Reporting a quota share
An insurer needs records connecting the original business to the applicable contract, cession percentage, premium, commission, claims, and recoveries. A bordereau can communicate this information to the reinsurer.
For example, an endorsement that increases a policy’s premium may also change the ceded premium and commission. A later claim adjustment changes the recovery calculation. Keeping those movements connected prevents a correct percentage from being applied to an outdated amount.
The primary policy and the reinsurance agreement remain separate contracts. The insurer’s promise to its policyholder is governed by the policy, while its recovery from the reinsurer depends on the reinsurance terms. Quota share changes the insurer’s retained exposure; it does not automatically replace the insurer as the customer’s counterparty.
