Importance of Quota Sharing

If you’ve stayed up with our newsletters over the past year, you’ve noticed a trend of topics geared toward a hardening market. For those that have renewed in the last few months, you know all too well that it’s here and has been for some time. A couple of key differences during a hard market are carrier appetite and carrier capacity. Both items become more and more limited in an effort to reduce exposure and recoup losses. This is where quota sharing comes in. Quota sharing is a process by which multiple carriers, anywhere from two to five or more, participate on the same risk. It divides the risk among multiple carriers so that no single carrier bears the entire exposure.

This process allows for operators to maintain full coverage even when a single carrier may not want or be able to fully provide insurance alone. This process is typically deployed on larger exposures and higher-risk exposures where values and/or liability limits exceed certain appetite thresholds. We’re seeing this a lot in the turbine helicopter market right now, given the excessive loss rate they’ve had in recent months. More often than not, this doesn’t impact the operator’s ability to continue operating as normal. It’s simply a different and more involved structure on the broker/carrier side. Our job is to fill the slip to 100% regardless of how many carriers it takes. In this situation there is a lead carrier to take the majority percentage, followed by one to four (or more) carriers taking following lines, depending on the percentage they’re willing to take.

The lead carrier’s policy form, conditions, terms, and exclusions are all followed by the other carriers. An agreement is signed by all, which specifies the share in claim payments based on the percentage each is committed to taking. This process is critically important during hard markets, because it’s often the only way to secure full and appropriate coverage for complex exposures. Without this agreement among carriers, there would be severe reductions in coverage for most operators, which would translate to drastic changes in business operations. Again, most of this work is behind the scenes and doesn’t have a drastic impact on the operator. There may be changes in rate from one carrier to the next, but the end result is often a uniform policy that allows the operator to continue operating normally — only now there are multiple carriers covering instead of one!