There are many types of reinsurance agreements. Quota Share is one of them, is described with examples. Quota Share Reinsurance Agreement requires the direct insurer to cede a predetermined proportion of all its business accepted in a certain class to the reinsurer(s), and the reinsurers, also agrees to accept that proportion in return for a corresponding proportion of the premium.
Example 1. Quota Share Reinsurance Agreement :
Direct Insurer : 10%
All Reinsurers : 90%
Risks assumed : USD 10,00,000
Therefore, risk distribution under this reinsurance arrangement will be as follows:
Direct Insurer: 10% = USD 100,000
All Reinsurers: 90% = USD 9,00,000
Risks Assumed: 100%=USD 10,00,000
Example 2: Quota Share Reinsurance Agreement :
Same as before. Risk assumed USD 1,00,000 (same type of risk) Therefore, risk distribution under this reinsurance arrangement will be :
Direct insurer 10% = USD 10,000
All Reinsurers 90% = USD 90,000
It should be noticed by the student is from the above two examples of Quota Share Reinsurance Agreement that for a similar type of risk the amount tailing onto the shoulder of the direct insurer is varying simply because of the term of the treaty, even though he could safely retain more. May be in the 2nd example, the direct company could retain the full amount of USD 1,00,000, thereby earning the whole of the premium. But the contract is debarring him from doing so as he must cede as per predetermined percentage.
In spite of the above shortcomings, Quota Share Reinsurance Agreement is, however, particularly helpful for small offices or for new office or for offices who are starting a new type of business. In case of a loss, it will be borne by all in the same proportion.