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Quota Share

A proportional reinsurance treaty where cedent and reinsurer share premium and losses at a fixed percentage, transferring a set portion of every policy.

industryPublished 2026/06/07Last verified 2026/06/07

FAQs

Why would a carrier want to cede premium through a quota share?
Ceding premium reduces income but also reduces capital requirements, loss volatility, and potential catastrophic exposure. Carriers use quota shares to manage growth (writing more business than their capital would otherwise support), enter new markets with reinsurer backing, and stabilize earnings. The ceding commission partially offsets the loss of premium income by covering acquisition and overhead costs.
What is the difference between a quota share and surplus share treaty?
Both are proportional reinsurance types, but they differ in how the proportion is determined. A quota share applies the same fixed percentage to every risk. A surplus share applies different percentages to different risks based on each risk's size relative to a defined retention. Surplus shares give the cedent more flexibility but are administratively more complex.
Can a 100% quota share be used in a fronting arrangement?
Yes, and it commonly is. In a fronting arrangement, the fronting carrier typically cedes 100% (or close to it) of premium and losses to the captive, reinsurer, or program entity behind the front. The fronting carrier retains only its fronting fee, earning a return for providing admitted paper and regulatory compliance infrastructure while bearing no meaningful underwriting risk.

Related Terms

  • Program Business

    Insurance written under delegated underwriting authority for a defined, homogeneous niche managed by an MGA or program administrator with specialized expertise.

  • Fronting Carrier

    An admitted insurer that issues policies on behalf of a captive or program lacking admitted status, providing regulatory paper while retaining minimal risk.

  • Reinsurance Intermediary

    A broker or manager arranging reinsurance placements between cedents and reinsurers, earning commission on placed premium for treaty and facultative deals.

  • Captive Insurance

    An insurance company wholly owned by the entity or group it insures, created to fund the owner's own risks rather than transfer them to a commercial carrier.

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A quota share is a proportional reinsurance treaty under which the cedent (primary insurer) and the reinsurer agree to share all premiums written and all losses incurred on a covered book of business in a fixed percentage ratio. If the quota share is 40%, the reinsurer receives 40% of every premium dollar and pays 40% of every loss dollar—regardless of the size of any individual loss.

How It Works / Why It Matters

Quota share reinsurance is the simplest and most transparent form of reinsurance. Because every risk in the covered book is shared proportionally, there is no selection against the reinsurer—both parties see the same loss experience from the same portfolio. This alignment of interest is one reason quota shares are frequently used in new program relationships, where the carrier wants the reinsurer to be a genuine risk partner rather than a separate counterparty.

Ceding commission: The defining economic feature of quota share reinsurance is the ceding commission. The reinsurer pays a percentage of ceded premium back to the cedent to compensate for policy acquisition costs (agent commissions, marketing expenses) and overhead. If the gross ceding commission is 35%, the cedent retains 35 cents of every ceded premium dollar to cover its costs, while the reinsurer nets 65 cents per dollar before losses.

Sliding scale commissions: Many quota shares include a sliding scale provision—the ceding commission increases as the ceded loss ratio decreases (rewarding the cedent when it produces profitable business) and decreases as the loss ratio rises (protecting the reinsurer when experience deteriorates). This aligns incentives: the cedent has reason to underwrite carefully because a deteriorating book reduces its commission income.

Key differences from excess-of-loss reinsurance: Quota share shares every loss proportionally; excess-of-loss responds only above a retention threshold. Quota share provides ceding commission to offset acquisition costs; excess-of-loss does not. Quota share reduces the cedent's net premium and net losses simultaneously; excess-of-loss protects only against large losses.

In Practice

A regional homeowners carrier with $50 million in annual premium has a 50% quota share treaty. The carrier cedes $25 million in premium to the reinsurer (net of a 32% ceding commission) and recovers 50% of all losses. This effectively halves the carrier's premium income but also halves its loss exposure—reducing the capital required to support the book.

Program and MGA usage: Quota share is the standard mechanism in program-business arrangements. A carrier providing capacity to a new MGA program will often take a significant quota share position (sometimes 80–100%) so that the economic risk closely follows the MGA's underwriting decisions. As the program develops a loss history, the carrier may reduce its quota share percentage and take more net retained exposure.

Capital management: Insurance regulators assess carriers on risk-based capital ratios. Quota share reinsurance reduces net written premium and net loss reserves, lowering the premium-to-surplus ratio and improving regulatory capital metrics. For thinly capitalized insurtech carriers or growing MGAs that have obtained carrier licenses, quota share can be essential for managing capital constraints during growth phases.

The reinsurance-intermediary plays a key role in negotiating quota share terms, particularly ceding commission levels and sliding scale parameters. Tools like Gradient AI provide the loss modeling and portfolio analytics that underpin quota share negotiations.

Related Concepts

Quota share relates to program-business (where it provides capacity), fronting-carrier arrangements (where 100% quota share is the standard risk transfer mechanism), and reinsurance-intermediary (who negotiates treaty terms).