Quota Share
Quota Share is a term used in re-insurance. Please see the glossary entry for re-insurance for an explanation of re-insurance and re-insurers. Short-term insurance companies, including those that sell car insurance spread the risk they carry by re-insuring some of it through re-insurers. This process is referred to as a re-insurance treaty.
When a new insurance company that specializes in car insurance starts out in the business it will need to buy more re-insurance in the beginning until it has build up sufficient reserves and has established a claims record. Short term insurance is by its very nature an unpredictable form of business.
A quota share treaty is a form of re-insurance where the re-insurer takes on a specific percentage quota of the risk. If it accepts a 40% quota share it will take on 40% of every risk that the ceding company accepts. The ceding company is also known as the direct writer or insurer – the one who wrote the business with the insured person.
The quota share system is more favourable to the re-insurer as the ceding company cannot keep the better risks for himself. The quota share system is mostly used in the case of a new insurance company during the early stages of business or where the re-insurer insists on using quota share.