Category: Reinsurance pricing · Reviewed by Simon Temme, Account Executive · Last reviewed
Quota share pricing
Quota share (QS) pricing sets the terms for a proportional reinsurance treaty in which the reinsurer assumes a fixed percentage of premium and losses on every cedent risk. The economics are driven less by the underlying expected loss ratio (which is shared proportionally) and more by:
Ceding commission — the reinsurer’s payment to the cedent for the premium ceded, reimbursing acquisition and overhead.
Profit commission — a share of treaty profit returned to the cedent above a threshold.
Loss participation features — sliding scale ceding commissions that increase or decrease with loss ratio.
Ceding commission
The ceding commission is typically set so that the cedent’s net combined ratio improves after cession (otherwise the treaty would have no commercial value). Negotiation centres on:
Expected cedent gross combined ratio.
Reinsurer’s view of expected loss ratio and adequate margin.
Frictional costs (brokerage, overhead, capital).
Strategic value of the relationship.
Sliding scale and profit commission
Sliding scale ceding commission — varies between minimum and maximum based on actual loss ratio.
Profit commission — fixed share of profit above a threshold (e.g. 50% of profit when loss ratio < 60%, subject to expense allowance).
Worked sketch
If a cedent expects a 70% LR and 30% expense ratio (gross), and seeks a 50% QS:
Ceded premium = 50% of gross written premium.
Ceded losses = 50% of incurred losses.
Ceding commission negotiated to cover acquisition cost (e.g. 27.5%) — leaving the reinsurer with a 72.5% net expected loss + expense ratio, before profit commission and own overhead.
References
Swiss Re. Pricing methods in proportional reinsurance.
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