Importance of Quota Sharing
If you’ve kept up with our newsletters over the past year, you’ve noticed a trend of topics geared toward a hardening market. For those who have renewed in the last few months, you know all too well that it’s here (and has been for some time). Among several things that are different during a hard market are key factors such as 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 in 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 insure them by themselves.
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 situations like these, there is a lead carrier that takes 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, exclusions, etc. are followed by the other carriers, and there’s an agreement signed by all to share in claim payments based on the percentage they’re committed to. 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 “friendly” agreement among carriers, there’d 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 rates from one carrier to the next, but the end result is often a uniform policy that allows the operator to continue operating as normal — only now there are multiple carriers covering instead of one!