Quota Share Treaty

    flowchart TD
	    A[Insurer] -->|75% of Premium| B[Quota Share Treaty]
	    A -->|75% of Losses| C[Reinsurer]
	    B ---> D[Reinsurer]
	    E[For every $100 policy] --> A
	    E -->|$25| B
	    E -->|$75| C

## What is a key characteristic of a quota share treaty? - [x] Shared losses according to a fixed percentage - [ ] Only premiums are shared - [ ] It guarantees profit for the insurer - [ ] There’s no sharing of any kind > **Explanation:** In a quota share treaty, both the insurer and the reinsurer share premiums and losses according to a defined percentage, thus working as partners in risk. ## What is the purpose of a quota share treaty? - [x] To free up cash flow and manage risk - [ ] To completely eliminate risk - [ ] To solely increase profits - [ ] To decrease underwriting opportunities > **Explanation:** Quota share treaties are used to enhance cash flow and diversify risk, not to entirely remove it from consideration. ## How do quota share treaties typically impact premiums? - [ ] The insurer keeps all the premiums - [x] Both parties share premiums proportionately - [ ] Premiums are frozen indefinitely - [ ] All premiums are returned to the customer > **Explanation:** Premiums are shared based on the percentage designated in the treaty, diverting part to the reinsurer. ## In what scenario would a quota share treaty be most useful? - [x] When wanting to take on more underwriting capacity - [ ] When an insurer has zero claims - [ ] After experiencing great financial losses - [ ] When there's overcapacity in the market > **Explanation:** Quota share treaties allow insurers to increase capacity and take on more business while sharing risks, which is useful when they aim to underwrite more. ## Which of the following refers to the percentage of risk retained by the insurer? - [ ] Reinsurance - [ ] Quota Share - [x] Retention - [ ] Diversification > **Explanation:** Retention indicates the portion of risk that the insurer keeps, while the quota share pertains to how that risk gets shared. ## What happens if the losses under a quota share treaty exceed the agreed percentage? - [ ] The reinsurer counts all gains - [ ] The insurer does not incur said losses - [ ] Losses get logged for future readings - [x] Losses are shared according to the agreed percentage > **Explanation:** Any losses incurred greater than the quota share's designated percentage are shared in line with the treaty terms. ## Does a quota share treaty eliminate all risks for an insurer? - [ ] Yes, it’s foolproof! - [x] No, just lowers financial risk - [ ] Yes, they always profit - [ ] No, but it makes them very popular > **Explanation:** While a quota share treaty lowers financial risk, it doesn’t eliminate it altogether. Insurers always retain some responsibility. ## What does it mean when a treaty allows for "pro-rata" sharing? - [ ] Each side takes a separate cake - [ ] Sharing based on an agreed percentage - [x] Losses and premiums are divvied up in strict ratios - [ ] There are no more expenses > **Explanation:** Pro-rata sharing means splitting premiums and losses according to a defined ratio—no cake slices here! ## What’s the primary benefit of a quota share treaty for insurers? - [x] Increased flexibility and capital - [ ] More risk with high interest rates - [ ] Banquet food with a side of liabilities - [ ] Decreased operational costs entirely > **Explanation:** The main advantage is that insurers gain flexibility, allowing them to manage their capital while diversifying risk. ## What trade-off might come from entering a quota share treaty? - [x] Smaller profits due to shared premiums - [ ] Guarantees of high returns totaling all earnings - [ ] Extra expenses on gourmet lunches - [ ] Absolutely no downsides at all > **Explanation:** Insurers may face smaller profits since they share both premiums and losses but gain security and greater underwriting capacity in return.