The biggest disadvantage of a Quota Share is that whether the risk is small or large, the percentage of retention or cession will be the same. Hence, even when the reinsured has capacity to retain more on small risks, yet they are forced to cede higher percentage of the risk to reinsurers.
This dis-advantage is overcome by the surplus treaty. However, surplus treaties are usually not that well balanced and the feed to the treaty is much lower.
Variable Quota Share can be a better solution wherein the retention and cession can vary based on size of the risk, yet the feed to the treaty is better and consequently the treaty is more balanced.
Example of a Variable Quota Share could be:
USD 0 to USD 100,000 ; Cession 10%
USD 100,000 to USD 1 million: Cession: 20%
USD 1 million to USD 2 million: Cession: 30%
USD 2 million to USD 3 million: Cession :40%
USD 3 million to USD 5 million: Cession: 50%
USD 5 million to USD 10 million: Cession: 75%
USD 10 million: to USD 20 million:: Cession 90%.
Not sure why, but we do not find many Variable Quota Share treaties in the market.
Blog by Atmaram Cheruvu
