In a quota share arrangement, how are claims paid?

• A. The primary and reinsurer share losses in proportion to the risk each assumes
• B. The reinsurer pays all losses until a cap is reached
• C. The primary insurer pays all losses with no involvement of reinsurer
• D. The premiums are paid only by the insured

Answer: (A)

Quota share is a proportional reinsurance arrangement where the reinsurer agrees to take a fixed percentage of each policy. Because of that, losses are shared in the same fixed proportion as the portion ceded to the reinsurer. If the primary insurer retains a certain share of risk, the reinsurer takes the rest, and each claim is paid in that same proportion by both parties. For example, with a 60/40 arrangement, the primary would cover 60% of each loss and the reinsurer 40%. The premiums collected from the insured are also divided in that same ratio, so the reinsurer receives its corresponding share of premiums. There is no cap or all-or-nothing payment by the reinsurer in quota share; that would describe a non-proportional form of reinsurance. This proportional sharing of both losses and premiums is what defines how claims are paid in a quota share setup.