Quota Share Treaty
Candlefocus EditorThe terms of the treaty involve sharing the risk associated with a certain portion of the insurer’s policies. Under the agreement, the primary insurer will retain coverage for up to a certain percentage of the policy, while the reinsurer will cover the remaining portion. For example, if the treaty is written for a certain percent of the risk (usually 50%), the insurer will collect 50% of the premium for the policy and the reinsurer will collect the remaining 50%.
The primary insurer will benefit from the treaty in two ways: first, its overall financial risk is lowered by 40-50%; second, it can now write more business than it could before. This allows the primary insurer to diversify its portfolio and benefit from the increased cash flow.
The reinsurer benefits from this type of contract as well because it can increase its premium income from the treaty and reduce its overall financial exposure. This type of contract also provides greater predictability when it comes to its income stream, allowing the reinsurer to plan its budget more accurately.
The arrangement between the primary insurer and the reinsurer is not exclusive and the primary insurer can negotiate a similar arrangement with multiple reinsurance companies. This can increase competition, drive down cost and provide additional options for the primary insurer.
Overall, a Quota Share Treaty is beneficial to both the primary insurer and the reinsurer as it both reduces financial exposure and provides the primary insurer with additional cash flow. This type of contract is an important tool and is likely to become even more popular in the coming years as insurers attempt to diversify their portfolios and reduce overall financial risk.