Quota share is the simplest form of reinsurance and that is exactly what makes it hard to use well. A fraction is set, say 30%, and it applies to everything: the reinsurer takes 30% of every premium in scope and pays 30% of every loss, whether an 800 euro water damage claim or a 4 million euro fire. No threshold, no condition, no selection. The reinsurer is a silent partner in the portfolio, in fixed proportion.
It is worth measuring what this mechanism does not do, because that is where the mistakes sit. A quota share does not reduce the relative volatility of the account: it divides good and bad results by the same number. A portfolio running 15 points of combined ratio adrift still runs 15 points adrift after a 50% quota share, on a base half the size. What it transfers is volume, not peak. Anyone buying a quota share hoping to cushion an exceptional loss has picked the wrong family of treaty.
What is it for, then, and the answer is three uses with nothing in common. The first is capital relief: ceding 30% of the portfolio reduces earned premium and carried reserves by as much, therefore the capital requirement, and that is often the real reason a young growing carrier buys one. The second is entry into a new class, where the cedant is mostly buying a reinsurer's tolerance while it learns. The third is reciprocity, older, where two carriers swap shares of uncorrelated portfolios to diversify each other.
The quantity that governs the economics of the treaty is the ceding commission, and it is the counterpart of the mechanism. The cedant has paid brokerage, acquisition costs and handling costs on 100% of the premium; it cedes 30% of it gross. Without a correction it would have worked for free on the reinsurer's behalf. The ceding commission returns a fraction of the ceded premium, calibrated to cover those costs, and it is what gets negotiated at renewal far more than the cession rate itself.
The vocabulary of this account deserves to be set down once, because it returns everywhere afterwards. Ceded premium is the share of premium that goes to the reinsurer, net premium is what the cedant keeps after cession. Ceded losses and net losses follow the same logic. The ceded loss ratio sets ceded losses against ceded premium, and it measures the reinsurer's result; the net loss ratio sets net losses against net premium, and it measures what is left with the cedant. The two can diverge sharply under a non-proportional treaty, but under a pure quota share they are equal by construction, commissions aside.
That equality is quota share's most useful property and its most misunderstood one. It means the reinsurer cannot win on a portfolio where the cedant loses, nor the other way round: their interests are aligned in the strict sense, which no other structure guarantees. That is why a quota share places quickly when the portfolio is sound, and not at all when it is not. A reinsurer declining to renew a quota share is saying something about the portfolio itself, not about its appetite.
One drafting point decides who carries what in practice: the base. A quota share may attach to written or to earned premium, on an underwriting year or on an accident year basis, and it may or may not include external claims handling costs. Two treaties described by the same percentage can therefore produce very different accounts. One never reads a cession rate on its own; one reads it with the definition of what it applies to.
A regional mutual writes a 2026 household portfolio of 40 million euros of written premium, with acquisition and handling costs of 28% of premium. It places a 35% quota share with a 26% ceding commission. The year settles at 27 million euros of losses. The finance director tells the board that the quota share "protected the result". Is that right, and what does the arithmetic show?
The arithmetic runs on both sides and it contradicts the sentence, without making the treaty useless. On 40 million of premium the cedant cedes 35%, that is 14 million, and keeps 26 million. Losses split in the same proportion: 9.45 million ceded, 17.55 million net. The loss ratio is 67.5% on both sides, and that is not a coincidence, it is the very definition of a quota share. The cedant therefore shows exactly the same technical ratio after reinsurance as before, on a smaller base: the treaty protected no result, it shrank it. Where it does act is on two other planes. The first is the commission: the cedant carries 28% of costs and receives 26% on the ceded share, so it loses 2 points on 14 million, that is 280,000 euros, which is the real cost of the cession that year. The second is capital: 14 million of premium and the matching reserves leave its balance sheet, which eases its capital requirement and lets it write more. If the board wanted to cushion an exceptional loss rather than fund its growth, quota share was not the instrument, and the finance director's sentence suggests a protection that does not exist.
- 01A quota share applies the same fraction to premiums and to every loss, with no threshold and no selection: it transfers volume, never peak.
- 02It does not reduce the relative volatility of the account: it divides good and bad results by the same number.
- 03Its three real uses are capital relief, entry into a new class, and reciprocity.
- 04The ceding commission returns to the cedant the costs it incurred on ceded premium; that is what gets negotiated, more than the cession rate.
- 05Under a pure quota share, ceded and net loss ratios are equal by construction: the two parties' interests are aligned in the strict sense.
- 06A cession rate is never read on its own: the base, written or earned premium, decides what the percentage means.