Quota share trade credit insurance explained

Quota share trade credit reinsurance is a proportional treaty form in which insurance companies share with the reinsurer premium, costs and losses in a proportional way for all qualifying risks with the same cession level. The International Credit Insurance & Surety Association (ICISA) states that proportional reinsurance in trade credit and surety is largely offered in the form of a quota share agreement. Variable quota share agreements and surplus treaties are related proportional forms that share premium, costs and losses proportionally but with different cession levels by size of risk.

Quota share therefore attaches to a defined portfolio of qualifying trade credit risks at a fixed percentage. It is the standard obligatory proportional structure behind many whole turnover and related credit insurance books, distinct from facultative placements on individual risks.

How quota share trade credit treaties work

Under a quota share agreement, the cedent and reinsurer share each qualifying risk at the agreed cession percentage. Premium, costs and losses follow that same proportion. ICISA contrasts this with non-proportional reinsurance, where premium, costs and losses are not shared proportionally. Under non-proportional cover, the insurance company accepts all losses up to a predetermined level and the reinsurer reimburses losses above that level up to a reimbursement limit. The most common non-proportional form in these lines is per risk or obligor cover. Aggregate portfolio covers exist but are less common.

Pricing of proportional treaties, including quota share, requires the reinsurer to assume an expected loss ratio for the defined period bearing in mind the underlying attachment principle. Considering that loss ratio expectation and the original costs of the insurance company, the cost remuneration (reinsurance commission) from reinsurers in favour of the insurance company is determined. The reinsurer then adds its own costs, including capital costs and margin requirements.

ICISA states that pure proportional treaties, pure non-proportional treaties and combinations of both are known in trade credit and surety. Choice is influenced by the insurer's risk appetite, risk bearing capacity and regulatory conditions. Proportional reinsurance tends to give full capital relief under most regulations, whereas non-proportional reinsurance might occasionally not give full relief. Both give risk management benefit. The financial rating of the reinsurer is of high importance in either case.

Portfolio role behind trade credit insurance

ICISA describes trade credit insurance as commonly sold on a whole turnover basis, with premium rates generally given as a percentage of the company's turnover. Policies may cover domestic as well as worldwide sales, and customers can often choose between insuring a single transaction or all their sales. The risk is diluted through insurance techniques and risk sharing by moving a larger or smaller part of the risk to a reinsurer.

Berne Union materials describe short-term credit insurance as comprehensive cover against non-payment and buyer default, usually as supplier credit insurance, and state that insurance may cover whole turnover, key accounts only, or single risk transactions. A quota share treaty is the natural proportional backstop for a whole turnover book because every qualifying risk is ceded at the same percentage, preserving the portfolio spread that whole turnover underwriting seeks.

Follow the fortunes language, as described by ICISA, normally provides that the reinsurer shall follow the underwriting fortunes of the reinsured for risks accepted under insurance contracts that form part of the reinsurance agreement, including cancellations, reductions, removals or other alterations and claims, provided the reinsured acts as it would if not reinsured. Treaty parties may deviate from that general rule. Quota share treaties therefore typically align reinsurer outcomes with the cedent's portfolio results on the ceded share.

Accumulation control and capital relief

Trade credit insurers may give separate covers for the same buyer, sector or country several times, creating accumulation. ICISA states that insurance and reinsurance companies maintain detailed accumulation control and that insurers seek reinsurance coverage according to risk appetite and risk bearing capacity per category. Quota share reduces retained accumulation proportionally across qualifying risks. It does not by itself cap a single name; surplus or facultative structures, or non-proportional per risk covers, address size concentration differently.

Capital relief is a stated reason for buying reinsurance in these lines. ICISA states that reinsurers with broad product and geographical diversification can offer value because capital costs may benefit from broader diversification, and that reinsurance can contribute to financial stability over the economic cycle. Quota share's proportional sharing of premium and loss is the form ICISA associates with a tendency toward full capital relief under most regulations.

Specialised reinsurance departments focus on trade credit and surety because these classes require knowledge of corporate default probabilities, trade sector developments, and economic and political country developments. Quota share capacity in trade credit is therefore specialty reinsurance capacity, not generic property treaty capacity relabelled.

Public and private market context

The Berne Union describes cooperation between public and private spheres of the credit insurance market through reinsurance and co-insurance structures that bring additional capacity, diversification and underwriting expertise. Official export credit agency programmes and private insurers may share risk through treaty and facultative channels. An export credit guarantee remains a primary official product. Quota share is a secondary proportional reinsurance form behind a primary insurance portfolio.

Variable quota share and surplus treaties remain proportional but change cession by size of risk. They sit beside flat quota share where the insurer needs different retained shares for larger limits. Non-proportional per obligor covers sit above or beside proportional treaties when the insurer seeks severity protection rather than proportional sharing of the whole book.

Quota share trade credit reinsurance is therefore the fixed-percentage proportional treaty that shares premium, costs and losses for all qualifying risks in the defined portfolio. It is the core obligatory proportional tool for trade credit books, complementary to facultative individual-risk placements and to non-proportional severity covers.