Financial Quota Share

What Is a Financial Quota Share?

A financial quota share is a reinsurance treaty in which the ceding company is responsible for a portion of the loss associated with a claim.

Financial quota shares don't need the ceding company to pay a deductible before coverage starts, as the company will constantly be responsible for a portion of the loss. Companies, including insurers, frequently treat reinsurance as a form of capital. This is on the grounds that a reinsurance treaty permits a ceding company to shift a portion of its risk off of its balance sheet and onto the reinsurer's, subsequently lessening the amount of capital it might need to utilize on account of a claim.

Understanding Financial Quota Share

There are two types of reinsurance: excess of loss and quota share. Excess of loss reinsurance is considered non-proportional, as the amount of the claim paid by the reinsurer and the ceding company is dependent on the claim seriousness. Quota share reinsurance is viewed as proportional, with the ceding company and reinsurer covering a similar amount of claim no matter what its seriousness. A company picking between these two types of coverage would need to gauge the probability of a high seriousness claim, as high seriousness claims are bound to make the excess of loss coverage more conservative.

A financial quota share considers surplus relief on the grounds that statutory accounting requires insurers and reinsurers to quickly charge all acquisition costs to the accounting period in which the business is written, even when the premium is unearned toward the finish of the period. It is alluded to as prepaid acquisition costs in the unearned premium reserve or the equity in the unearned premium reserve.

Illustration of Financial Quota Share

For instance, an insurance company is looking at whether to go into a reinsurance treaty that is either quota share or excess of loss. The quota share rate is set at 75%, and the excess of loss has 100% coverage after a $75,000 deductible. A $100,000 claim would cost the ceding company $75,000 under an excess of loss reinsurance arrangement, however $25,000 under a quota share. A $1,000,000 claim would cost the ceding company $75,000 under an excess of loss arrangement, however $250,000 under a quota share.

The ceding company would lean toward an excess of loss arrangement for the $1,000,000 claim since it would be paying 7.5% of the claim as opposed to the 25% it would pay in a quota share. For the $100,000 claim it would favor a quota share since that would let it pay 25% of the total claim instead of the 75% under the excess of loss option.

Highlights

• Quota share reinsurance is viewed as proportional, with the ceding company and reinsurer covering a similar amount of claim no matter what its seriousness.
• A financial quota share is a reinsurance treaty where the ceding company is responsible for a portion of the loss associated with a claim.