Quota Share Reinsurance: A Straightforward Approach to Risk Sharing

May 29, 2025

In our previous post, Reinsurance Explained: A Guide to Insurance for Insurers, we introduced the foundational purpose of reinsurance: helping insurers spread risk, manage capital, and ensure long-term solvency. In this post, we’ll dive into one of the most widely used forms of reinsurance—Quota Share.

Simple, consistent, and reliable, quota share reinsurance is a proportional reinsurance method that allows primary insurers to cede a fixed percentage of every policy to a reinsurer. Let’s explore how it works, how to account for it, and when it’s the best fit for your company.

What is Quota Share Reinsurance?

Quota share reinsurance is a type of proportional reinsurance agreement in which a primary insurer cedes a fixed percentage of every policy in a defined portfolio or block of policies to a reinsurer. In return, the reinsurer receives the same percentage of premiums and is responsible for the same percentage of losses and expenses.

How it Works in Practice:

Let’s say an insurer enters a 40% quota share agreement with a reinsurer. That means:

The insurer cedes 40% of the premiums from the covered policies.
The reinsurer pays 40% of all losses and claims on those policies.
The insurer retains the remaining 60%.

If a $100,000 claim is incurred:

Insurer pays $60,000
Reinsurer pays $40,000

Likewise, if the premium on that policy is $1,000, the reinsurer receives $400 in premium and pays its proportional share of underwriting expenses.

Accounting for Quota Share

From an accounting perspective, quota share arrangements are relatively straightforward to account for:

Premiums: The insurer records 100% of gross written premium, then recognizes ceded premium as an offsetting entry. The net premium retained equals the insurer’s share.
Losses: Loss reserves are established gross, with ceded reserves recorded separately to reflect the reinsurer’s share.
Commissions: Often, a ceding commission is paid by the reinsurer to the insurer, reimbursing acquisition costs and overhead.

Advantages of Quota Share Reinsurance

One of the key advantages of quota share reinsurance is its consistency and simplicity. Because the ceding company transfers a fixed percentage of every covered policy to the reinsurer, both underwriting and accounting become more predictable. This kind of proportional arrangement makes it easy to calculate how much premium and risk is being shared, and it simplifies the internal systems needed to track that data.

Quota share can also provide meaningful capital relief. By ceding a portion of premium and loss exposure, insurers can reduce their net liabilities, which in turn lowers the amount of surplus required to support the book of business. This can be especially important for growing companies or new entrants to the market who want to expand their underwriting capacity without overextending their capital base.

In addition, many quota share agreements include a ceding commission paid by the reinsurer to the insurer. This commission helps cover acquisition and administrative costs, and in some cases can even result in an upfront profit for the ceding company, depending on the terms of the agreement. Over time, this shared risk and reward model can help smooth out volatility in underwriting results and improve financial stability.

Challenges and Considerations

Despite its simplicity, quota share reinsurance is not without its limitations. One of the most important considerations is the trade-off involved in ceding both risk and reward. While an insurer shares losses with the reinsurer, it also shares premium and potential underwriting profit. This can reduce the ceding company’s overall return on profitable books of business and may lead to a long-term cost if not properly negotiated.

Another challenge is that quota share does not differentiate between high-risk and low-risk policies within the ceded portfolio. The reinsurer receives the same percentage of every policy, regardless of risk quality. This means that the ceding company may inadvertently subsidize the reinsurer by passing along more profitable policies or underprice business that it might otherwise handle more selectively. If not paired with strong underwriting discipline, quota share arrangements can create misaligned incentives or a lack of focus on individual policy performance.

Additionally, while quota share reinsurance agreements are easier to administer than other types of agreements, they still require careful implementation and monitoring. Reinsurance agreements must be reviewed regularly to ensure they remain aligned with the company’s financial goals, loss trends, and capital needs. Overreliance on quota share reinsurance can sometimes mask weaknesses in underwriting or pricing strategies, which can become problematic if terms change or the reinsurer becomes less willing to share risk.

Key Takeaways

Quota share is one of the most straightforward and widely used forms of reinsurance.
It allows for predictable, proportional risk sharing and can help stabilize financial results.
It’s not one-size-fits-all, but it offers powerful advantages for certain lines, especially when growth, stability, or capital management are priorities.

At Larson, we work closely with insurers and captives to navigate the technical accounting and strategic implementation of quota share and other reinsurance arrangements. If you’d like help reviewing the accounting treatment of your reinsurance agreements or improving documentation for compliance, please reach out and we would be happy to work with you. Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.