I recently received an email from a reader asking a couple of questions :
"I'm trying to understand Net vs Gross Quota shares in reinsurance. Is a 'Net Quota Share' always defining a treaty where the reinsurer will pay ceding commissions on the Net Written Premium? ... Are there some Net Quota Shares where the reinsurer caps certain risks (e.g. catastrophe)?"
It's a reasonable question, and the answer is a little context dependent, full explanation given below.
Source: https://unsplash.com/@laurachouette, London
(As an aside, in the last couple of weeks, the UK has lurched from what was a rather pleasant summer into a fairly chilly autumn, to mirror this, here's a photo of London looking a little on the grey side.)
Taking a step back, 'Net' in the context of reinsurance refers to something being subtracted off a given value.
If someone used the term 'net quota share', baring any clear indication otherwise, my working assumption would be that they were referring to a quota share where the original brokerage is netted off before the premium is ceded, and then the cede commission is paid as a % of premium net of original commissions. (Which was the version described by the reader)
That being said, returning to my original point above about net referring to *something* being subtracted off, a 'net quota share' can also refer to *inuring reinsurance* being subtracted off. For example, if there is an XoL layer, and the quota share operates on the premium and losses after the XoL premium has been deducted, and the XoL recoveries have been subtracted from losses, then this may also be referred to as a net quota share.
The first use (netting off original brokerage) is probably more common, but if there was ever any confusion I'd 100% ask rather than assuming which one was being referred to.
In respect of the 'caps' question - it's not uncommon to have caps and other structuring on a quota share. I've seen loss ratio caps, per occurrence caps, or as the question refers to, sometimes specific perils such as cat may have a cap as well.
I work as an actuary and underwriter at a global reinsurer in London.