moneydif.com Excess of Loss and Quota Share are two primary reinsurance methods used to manage risk exposure in insurance portfolios. Excess of Loss coverage protects insurers by covering losses that exceed a predetermined retention limit, ideal for safeguarding against catastrophic events. Quota Share reinsurance involves sharing a fixed percentage of premiums and losses between the insurer and reinsurer, balancing risk and capital requirements more evenly across all policies.
Table of Comparison
| Feature | Excess of Loss Insurance | Quota Share Insurance |
|---|---|---|
| Definition | Reinsurance covering losses above a specified retention limit. | Proportional reinsurance sharing premiums and losses at a fixed percentage. |
| Risk Sharing | Non-proportional; reinsurer covers losses exceeding cedent's retention. | Proportional; both insurer and reinsurer share losses and premiums. |
| Retention | Fixed retention limit retained by insurer. | No specific retention; risk shared based on agreed quota. |
| Premium Calculation | Based on expected losses over retention and coverage layers. | Proportional to the quota share percentage. |
| Best Use | Protects against large, catastrophic losses. | Stabilizes loss experience and capital requirements. |
| Claims Handling | Reinsurer pays only when loss exceeds retention limit. | Reinsurer shares all claims proportional to quota. |
| Common Sectors | Property, catastrophe, excess liability insurance. | Life, health, and some property insurance sectors. |
Understanding Excess of Loss and Quota Share
Excess of Loss and Quota Share are two key reinsurance methods used to manage risk in the insurance industry. Excess of Loss reinsurance provides coverage only for losses exceeding a predetermined amount, protecting insurers from catastrophic claims. Quota Share reinsurance involves sharing a fixed percentage of premiums and losses between the insurer and reinsurer, ensuring proportional risk distribution and premium sharing.
Key Differences Between Excess of Loss and Quota Share
Excess of Loss reinsurance provides protection against losses exceeding a specified retention limit, primarily benefiting insurers by limiting large, catastrophic claims, whereas Quota Share involves sharing a fixed percentage of premiums and losses between insurer and reinsurer. In Excess of Loss, the insurer retains losses up to a retention point and transfers excess risk, making it non-proportional, while Quota Share is proportional, distributing both premiums and claims in equal ratios. Key differences include risk transfer mechanisms, premium sharing, and loss handling, with Excess of Loss focusing on high-severity, low-frequency events and Quota Share on proportional risk and income sharing.
Structure of Excess of Loss Reinsurance
Excess of Loss reinsurance is structured to provide coverage only after losses exceed a predetermined retention limit, protecting insurers from high-severity claims by capping their liability. This form contrasts with Quota Share reinsurance, where a fixed percentage of both premiums and losses is shared proportionally between the insurer and reinsurer. The Excess of Loss structure effectively limits catastrophic risk exposure, allowing primary insurers to manage solvency and maintain underwriting capacity.
Structure of Quota Share Reinsurance
Quota Share reinsurance involves the ceding insurer and reinsurer sharing a fixed proportion of premiums and losses, typically ranging from 10% to 50%, based on a pre-agreed percentage of the entire portfolio. This proportional structure ensures risk and premium are divided evenly, maintaining a balance in exposure and underwriting capacity. The reinsurer accepts a proportional share of liabilities, facilitating smoother cash flow and simplifying claims management compared to Excess of Loss treaties.
Advantages of Excess of Loss Reinsurance
Excess of Loss reinsurance protects insurers from catastrophic losses by providing coverage only when claims exceed a predetermined retention limit, which helps stabilize loss experience and conserve capital. This type of reinsurance enables primary insurers to maintain underwriting control while limiting their exposure to high-severity claims, ensuring financial stability. Excess of Loss arrangements improve risk management by capping potential losses on volatile or unpredictable lines of business compared to proportional methods like Quota Share.
Advantages of Quota Share Reinsurance
Quota share reinsurance offers insurers predictable risk sharing by ceding a fixed percentage of premiums and losses, enhancing capital relief and improving solvency margins. This proportional approach simplifies claims handling and facilitates stronger insurer-reinsurer collaboration through aligned incentives. It enables consistent underwriting capacity, supporting business growth while stabilizing loss experience more effectively than excess of loss treaties.
Applicability and Use Cases in the Insurance Industry
Excess of Loss insurance is primarily applied for catastrophic risk protection, where insurers retain losses up to a certain threshold and reinsurers cover losses beyond that limit, making it ideal for high-severity, low-frequency events like natural disasters. Quota Share reinsurance distributes premiums and losses proportionally between the insurer and reinsurer, enhancing capital management and stabilizing underwriting results, which suits portfolios with consistent loss patterns such as personal lines or standard commercial risks. Choosing between Excess of Loss and Quota Share depends on risk appetite, capital structure, and the volatility profile of the insurance portfolio.
Impact on Insurer’s Risk Retention
Excess of Loss reinsurance limits the insurer's risk retention by covering losses above a specified threshold, providing protection against catastrophic claims and stabilizing loss volatility. Quota Share reinsurance involves ceding a fixed percentage of premiums and losses, directly reducing the insurer's retained risk proportionally across all policies. Choosing between these structures impacts capital requirements and risk appetite, with Excess of Loss favoring retention of smaller claims while Quota Share spreads risk evenly.
Financial Implications: Premiums and Claims Handling
Excess of Loss insurance minimizes the insurer's financial risk by capping claim payouts, resulting in typically higher premiums but controlled exposure to large losses. Quota Share arrangements spread both premiums and claims proportionately between insurer and reinsurer, creating predictable cash flows but less protection against catastrophic losses. The financial implications hinge on risk appetite and capital management strategies, with Excess of Loss favoring loss containment and Quota Share emphasizing premium stability.
Choosing the Right Reinsurance Strategy for Your Portfolio
Excess of Loss reinsurance protects insurers from catastrophic losses by covering claims above a specified retention limit, making it ideal for portfolios with high-severity risks. Quota Share reinsurance involves sharing a fixed percentage of premiums and losses with the reinsurer, providing predictable risk distribution and premium stabilization. Selecting the appropriate strategy depends on your portfolio's risk profile, loss frequency, and capital management goals to optimize financial stability and growth.
Important Terms
Retention limit
Retention limit in Excess of Loss reinsurance defines the maximum loss an insurer retains before the reinsurer covers the excess, emphasizing protection against large, unpredictable losses. In Quota Share arrangements, retention limit reflects a fixed percentage of risk retained by the insurer, facilitating proportional sharing of premiums and losses.
Ceding commission
Ceding commission in Excess of Loss reinsurance is typically lower or nonexistent because the reinsurer only covers losses above a specified retention limit, reducing administrative expenses and profit sharing. In Quota Share contracts, ceding commissions are higher as reinsurers accept a fixed percentage of all premiums and losses, compensating the ceding insurer for acquisition and operating costs associated with the proportional risk transfer.
Treaty reinsurance
Treaty reinsurance includes Excess of Loss and Quota Share, where Excess of Loss covers losses exceeding a predetermined retention limit, protecting insurers from high-severity claims, while Quota Share involves sharing a fixed percentage of premiums and losses between insurer and reinsurer. Excess of Loss is preferred for catastrophic risk protection, whereas Quota Share ensures proportional risk and premium distribution, optimizing capital management and underwriting capacity.
Risk attachment
Risk attachment in Excess of Loss reinsurance triggers coverage once losses exceed a predetermined retention, protecting against high-severity, low-frequency claims. Quota Share reinsurance shares a fixed percentage of all losses from the first dollar, providing proportional risk transfer and premium sharing.
Layering structure
Layering structure in reinsurance divides risk into multiple layers, with Excess of Loss covering losses above a predetermined retention up to a set limit, effectively protecting against large, unexpected claims, while Quota Share shares a fixed percentage of all losses and premiums between the insurer and reinsurer, providing proportional risk distribution. Understanding the balance between these layers optimizes risk retention and capital efficiency in reinsurance contracts.
Proportional reinsurance
Proportional reinsurance involves sharing premiums and losses between the ceding insurer and reinsurer based on a fixed percentage, with Quota Share representing a straightforward proportional split, whereas Excess of Loss reinsurance is non-proportional, triggered only after losses exceed a specified retention limit, providing protection against catastrophic claims. Quota Share contracts help stabilize loss ratios through proportional coverage, while Excess of Loss limits the insurer's exposure to large losses without sharing smaller claims.
Non-proportional reinsurance
Non-proportional reinsurance, exemplified by Excess of Loss, provides coverage for losses exceeding a specified retention limit, unlike Quota Share which involves proportional sharing of premiums and losses between insurer and reinsurer. Excess of Loss reinsurance is typically used to protect against catastrophic or large individual losses, whereas Quota Share ensures steady risk distribution and capital relief.
Loss corridor
Loss corridor provisions create a boundary in reinsurance contracts to limit the ceding company's loss sharing, optimizing risk retention between excess of loss and quota share arrangements. This mechanism adjusts the reinsurer's liability by restricting recovery within a specified loss range, blending the volatility protection of excess of loss with the proportional sharing of quota share treaties.
Surplus share
Surplus share reinsurance allows ceding insurers to retain a fixed sum insured and cede the excess above that retention to the reinsurer, differing from quota share which involves sharing premiums and losses on a fixed percentage basis. Excess of loss reinsurance protects against losses exceeding a specified retention, whereas surplus share optimizes risk retention by ceding only the surplus risk beyond the insurer's retention limit.
Aggregate deductible
Aggregate deductible in Excess of Loss reinsurance specifies the cumulative loss amount the ceding company must cover before reinsurance payments begin, protecting the reinsurer from smaller, frequent claims; in Quota Share agreements, aggregate deductibles are less common since risk and premiums are shared proportionally regardless of the total losses. Excess of Loss aggregate deductibles emphasize loss thresholds and retention levels, while Quota Share focuses on proportional risk transfer without aggregate loss limitations.
Excess of Loss vs Quota Share Infographic
