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Last updated on 2024年9月9日

How do you manage the risk exposure and capital requirements of quota share and surplus share arrangements?

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Quota share and surplus share are two types of reinsurance arrangements that allow insurers to transfer some of their risk and capital to reinsurers. In both cases, the insurer and the reinsurer agree to share a certain percentage or amount of the premiums and losses of a portfolio of policies. However, there are some key differences and implications for managing the risk exposure and capital requirements of these arrangements. In this article, you will learn how to compare and contrast quota share and surplus share, and how to use them effectively to balance your risk appetite and financial objectives.

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Retention limits management:

Setting appropriate retention limits helps transfer excess risk to reinsurers. This allows insurers to retain manageable risks while continuously assessing and adjusting these limits for current market conditions.### *Combining strategies:Employ a mix of quota share for stable business lines and surplus share for higher-value policies. This balance optimizes risk exposure, capital requirements, and growth objectives efficiently.

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1 Quota share basics

A quota share arrangement is a proportional reinsurance contract where the insurer and the reinsurer split a fixed percentage of the premiums and losses of a portfolio of policies. For example, if the insurer cedes 40% of its business to the reinsurer, it will also receive 40% of the premiums and pay 40% of the losses. The insurer benefits from a quota share arrangement by reducing its risk exposure, increasing its underwriting capacity, and improving its solvency ratio. The reinsurer benefits by receiving a steady income stream and diversifying its portfolio.

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Alex Zaiser

Sales approach and a competitive mindset to achieve results
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I agree in that quota shares are a foundation for insurers to expand their business, and reinsurers are sharing the earned premiums associated, in turn both are steadily and maintaining solvency. The Insurer decrease in liabilities, and can improve loss ratio. and Adjust and free up cash, where unique and catastrophic scenarios may strain their built in reserves.

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Mufumba Paul

Host:The Insurance 4Cus Podcast on YouTube | Insurance Underwriter|Centent Creator |Insurance Researcher | Writer| CEO-Austech Dynamite Company. BBA-INSURANCE |PROCUREMENT LOGISTICS, SUPPLY CHAIN| PGD-FINANCE
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To manage risk exposure and capital requirements for quota shares and surplus share requirements, insurers conduct thorough risk assessments, considering factors such as underwriting risk, market volatility, and regulatory requirements. They may adjust their reinsurance arrangements, allocating quota shares and surplus shares strategically to diversify risk and optimize capital utilization. By leveraging reinsurance to transfer portions of risk to third-party reinsurers, insurers can enhance financial stability, improve solvency ratios, and ensure compliance with regulatory capital requirements, thereby protecting policyholders and shareholders against potential losses.

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Shahzad Ali
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Managing risk exposure involves sharing premiums and losses proportionally, allowing the insurer to transfer a consistent percentage of risk to the reinsurer. Diversifying risk across multiple reinsurers reduces the impact of a single large loss, and maintaining strict underwriting guidelines ensures shared risks are acceptable for both parties. Managing capital requirements entails reducing the capital needed to cover potential losses, thus improving the insurer's solvency. It is crucial to ensure that the capital held meets regulatory requirements, which may be lower due to the shared risk, and to evaluate the financial strength of reinsurers to ensure they can meet their obligations for large claims.

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2 Surplus share basics

A surplus share arrangement is also a proportional reinsurance contract, but instead of splitting a fixed percentage of the premiums and losses, the insurer and the reinsurer split a fixed amount of the liability per policy. The insurer sets a retention limit, which is the maximum amount of risk it is willing to retain per policy, and cedes the excess amount to the reinsurer. For example, if the insurer has a retention limit of $100,000 and writes a policy with a liability of $300,000, it will cede $200,000 (or 67%) to the reinsurer. The insurer benefits from a surplus share arrangement by protecting itself from large losses, expanding its market share, and optimizing its capital allocation. The reinsurer benefits by participating in high-value policies and leveraging its expertise and capacity.

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Alex Zaiser

Sales approach and a competitive mindset to achieve results
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This is intersting because in this surplus share the reinsurer is almost ceding their payment for liabiltiies, where as quota share they are sharing premiums and liabilities. Surplus share uses a retention limit and writes the policy, this is exactly why and how control can help insurers. But may make leveraging their portfolio balanced especially with higher liabilities.

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3 Quota share vs surplus share

The main difference between quota share and surplus share is the way they allocate risk and capital between the insurer and the reinsurer. Quota share is more straightforward and predictable, as it involves a fixed percentage of the entire portfolio. Surplus share is more flexible and dynamic, as it involves a variable percentage of each policy depending on its liability. Quota share is more suitable for insurers who want to reduce their overall risk exposure, stabilize their income, and comply with regulatory requirements. Surplus share is more suitable for insurers who want to retain more control over their underwriting decisions, target higher-value policies, and maximize their return on capital.

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Shahzad Ali
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Managing risk exposure involves setting appropriate retention limits to transfer only the excess risk to the reinsurer, allowing the insurer to retain manageable risks. Continuous assessment of retained and ceded risks ensures retention limits are suitable for the current environment. Additional catastrophe reinsurance protects against large losses from accumulated retained risks. Managing capital requirements efficiently involves ceding excess risk, with capital needs based on the retained portion. Regular financial analysis ensures sufficient capital coverage for retained risks and compliance with regulatory and solvency requirements.It is also essential to ensure that reinsurers are financially strong and capable of covering ceded risks.

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Joel Apiri

Reinsurance Analyst | Project Manager | Risk Manager
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Excellent submission on the above highlighted key differences between quota share and surplus share reinsurance arrangements. Quota share's predictability and simplicity makes it an attractive option for insurers seeking stability and risk reduction, while surplus share's flexibility and targeting capabilities appeal to insurers looking to optimize their underwriting and maximize returns. The underwriting policy of the insurers will surely help them make informed decisions about their reinsurance strategies.

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4 Quota share advantages and disadvantages

Quota share has some advantages and disadvantages for insurers and reinsurers. For insurers, it reduces risk exposure and volatility, increases underwriting capacity and solvency ratio, improves cash flow and profitability, and provides a stable income stream. For reinsurers, it provides portfolio diversification and a fixed proportion of premiums and losses. However, it reduces the insurer's control over its underwriting strategy, incentive to improve underwriting quality, and ability to manage costs. It also reduces the reinsurer's profitability and competitiveness.

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5 Surplus share advantages and disadvantages

Surplus share has some advantages and disadvantages for insurers and reinsurers. Advantages include protection from large losses, expansion of market share, optimization of capital allocation, and the opportunity for the reinsurer to participate in high-value policies. Disadvantages include increased risk exposure and volatility for both the insurer and reinsurer, decreased cash flow and solvency ratio for the insurer, and increased risk exposure and volatility for the reinsurer due to sharing a variable proportion of liability.

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6 How to use quota share and surplus share effectively

When choosing between quota share and surplus share, the insurer's risk appetite, financial objectives, and market conditions must be taken into account. There is no one-size-fits-all solution, as each arrangement has its pros and cons. Generally speaking, quota share should be used when reducing risk exposure, increasing underwriting capacity, and improving solvency ratio is desired. This type of arrangement is especially helpful for new or small insurers who need to build their reputation and capital base or those facing high regulatory or rating agency requirements. On the other hand, surplus share is best for protecting from large losses, expanding market share, and optimizing capital allocation. It is most beneficial for established or large insurers with a strong underwriting track record and competitive advantage or those operating in niche or high-value markets. Additionally, a combination of quota share and surplus share may be used to balance risk exposure, capital requirements, growth, and profitability goals. Quota share can be used for core or stable business lines while surplus share is useful for emerging or volatile business lines. Furthermore, quota share may be employed for lower-value policies while surplus share is suitable for higher-value policies.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Katleho Paballo Makupu

Strategic Clients Divisional Manager | FASSA | Ted Speaker | M&G Top 200 Young South Africans 2020 | Africa’s Most Influential Woman in Business and Government 2019 | Award winning Youth Philanthropist
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In my experience, this first thing that needs to be taken into consideration is: 1. Who are the stakeholders? Are we considering the risk exposure from a cedent, regulator or reinsurance view? 2. Risk and exposure is different depending on who the stakeholder is? Simple example: a cedent receives commission (hence an increase to own funds) whilst a reinsurer pays commission (a decrease in own funds). 3. Regulation, to a certain degree, drive the discussion on risk exposure and capital (e.g. read up on SAM or Solvency II based on the relevant jurisdiction)

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Ricardo Chang

| Strategic Business Manager | BDM | Sales & Commercial | B2B & B2C | Disruptive Innovator | Mentor
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Para gestionar la exposición al riesgo y los requisitos de capital de los acuerdos de cuotas y excedentes de acciones, es fundamental evaluar el riesgo, establecer límites de exposición, utilizar herramientas de gestión de riesgos, establecer requisitos de capital adecuados, proporcionar formación y capacitación y proporcionar retroalimentación continua.

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How do you manage the risk exposure and capital requirements of quota share and surplus share arrangements?

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1 Quota share basics

2 Surplus share basics

3 Quota share vs surplus share

4 Quota share advantages and disadvantages

5 Surplus share advantages and disadvantages

6 How to use quota share and surplus share effectively

7 Here’s what else to consider

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