Reinsurance 101 for New Pet Insurance MGAs: Quota Share vs Excess of Loss

Insurance

Reinsurance 101 for New Pet Insurance MGAs: Quota Share vs Excess of Loss

|Posted by Hitul Mistry / 14 Mar 26

Reinsurance is a foundational concept that every MGA founder must understand. While the MGA does not typically negotiate directly with reinsurers (the fronting carrier handles this), understanding reinsurance structures helps you negotiate better carrier terms, build more accurate financial models, and demonstrate sophistication to carrier partners.

This guide explains the two primary reinsurance structures used in pet insurance programs and their impact on MGA economics.

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What Is Reinsurance and Why Does It Matter for MGAs?

Reinsurance is insurance for insurance companies when a carrier writes a pet insurance program, it transfers a portion of the risk to a reinsurer to reduce exposure, lower capital requirements, and stabilize financial results. For MGA founders, understanding reinsurance is essential because it directly affects carrier willingness to provide capacity, the commission structures available to the MGA, and the profit-sharing calculations that drive long-term MGA economics.

For pet insurance MGA programs, reinsurance typically sits behind the fronting carrier arrangement:

Flow of risk:

Policyholder pays premium to the MGA (on behalf of the carrier)
Carrier retains a portion of the premium and risk
Reinsurer takes a portion of the premium and assumes corresponding risk
Claims are shared proportionally or based on attachment thresholds

1. Why Reinsurance Matters for MGAs

Even though the MGA does not bear underwriting risk directly, reinsurance affects:

Carrier willingness to provide capacity — Better reinsurance terms make carriers more willing to back new programs
Commission structures — Reinsurance ceding commissions flow through to MGA commission calculations
Profit sharing — Reinsurance costs affect the loss ratio calculations that trigger profit sharing
Program scalability — Adequate reinsurance allows faster premium growth
Program continuity — Reinsurer confidence supports long-term carrier relationships

Quota share reinsurance is a proportional treaty in which the carrier cedes a fixed percentage of both premiums and losses to a reinsurer, typically ranging from 30–80% for pet insurance programs. In exchange, the reinsurer pays a ceding commission of 30–38% of ceded premium back to the carrier, which compensates for acquisition and administration costs and flows through to MGA commission economics.

1. How It Works

In a quota share treaty, the carrier cedes a fixed percentage of premiums and losses to the reinsurer:

Example: 50% Quota Share

Premium collected: $1,000,000
Carrier retains: $500,000 premium / $500,000 of losses
Reinsurer takes: $500,000 premium / $500,000 of losses
Ceding commission: Reinsurer pays carrier 35% of ceded premium ($175,000)

The ceding commission compensates the carrier (and indirectly the MGA) for acquisition costs, administration, and claims handling.

Parameter	Typical Range
Cession percentage	30–80%
Ceding commission	30–38% of ceded premium
Sliding scale commission	±3–5% based on loss ratio
Profit commission	15–30% of treaty profit
Loss ratio cap	75–85% (above which profit share ceases)
Treaty term	12 months, renewable

Predictable risk sharing — Both premiums and losses are shared in fixed proportions
Capital relief — Reduces the carrier's required statutory capital
Cash flow benefit — Ceding commissions provide immediate cash flow to the carrier
Earnings stability — Smooths out loss ratio volatility
Simpler to understand — Straightforward proportional structure

Profit sharing is proportional — Carrier and MGA give up a share of upside on profitable business
Reinsurer has full exposure — Even small, manageable losses are shared
Cost can be high — Net cost of reinsurance reduces available margin

How Does Excess of Loss Reinsurance Work?

Excess of loss (XOL) reinsurance only responds when losses exceed a specified threshold called the attachment point, protecting the carrier against individual large claims or aggregate portfolio-level loss accumulation. Unlike quota share, XOL does not share premiums proportionally the carrier pays a fixed reinsurance premium (typically 2–8% of subject premium) and retains all profit on claims below the attachment point.

1. How It Works

Excess of loss (XOL) reinsurance only responds when losses exceed a specified threshold:

Example: $10,000 XOL with $50,000 limit

Individual claim of $8,000: Carrier pays 100% (below attachment point)
Individual claim of $25,000: Carrier pays $10,000, reinsurer pays $15,000
Individual claim of $75,000: Carrier pays $10,000, reinsurer pays $50,000 (limit), carrier pays remaining $15,000

2. Types of XOL for Pet Insurance

1. Per-Risk XOL

Protects against individual large claims on a single pet. Less common in pet insurance since individual claim severity is generally manageable.

2. Aggregate XOL (Stop Loss)

Protects against portfolio-level loss accumulation. If the overall loss ratio exceeds a threshold (e.g., 80%), the reinsurer covers excess losses up to a specified limit.

3. Catastrophe XOL

Protects against correlated loss events affecting multiple policies simultaneously. Less relevant for pet insurance than for property lines, but could apply to scenarios like contaminated pet food affecting many pets.

3. Typical XOL Terms for Pet Insurance

Parameter	Typical Range
Attachment point (per-risk)	$5,000–$25,000
Limit (per-risk)	$25,000–$100,000
Aggregate attachment	75–85% loss ratio
Aggregate limit	10–25 points above attachment
Rate	2–8% of subject premium
Co-participation	10–20% carrier retention above attachment

4. Advantages of XOL

Retains more upside — Carrier and MGA keep all profit on claims below attachment
Lower cost — Premium is typically lower than quota share cession
Targeted protection — Addresses specific tail risk scenarios
Preserves control — Carrier retains more decision-making authority

5. Disadvantages of XOL

No capital relief — Does not reduce statutory capital requirements as effectively as quota share
No cash flow benefit — No ceding commissions
Basis risk — May not respond if losses are spread across many small claims rather than concentrated in large ones

The fundamental difference is that quota share shares all premiums and losses proportionally (providing capital relief, ceding commissions, and earnings stability), while excess of loss only responds above a threshold (retaining more profit potential but offering no capital relief or cash flow benefits). New pet insurance programs typically favor quota share for stability, transitioning toward excess of loss as the book matures and loss history becomes credible.

Feature	Quota Share	Excess of Loss
Premium sharing	Proportional	None (fixed premium)
Loss sharing	Proportional	Only above attachment
Capital relief	Significant	Limited
Cash flow (ceding commission)	Yes	No
Cost structure	Higher net cost	Lower net cost
Profit retention	Shared	Mostly retained
Best for	New programs, capital relief	Mature programs, tail risk

What Is the Recommended Reinsurance Strategy for New Pet Insurance MGAs?

New pet insurance MGAs should pursue a layered reinsurance strategy that combines a primary quota share treaty (ceding 40–70%) for capital relief and stability during the growth phase, with an aggregate stop-loss excess layer for protection against portfolio-level adverse development. As the program matures over 3–5 years, the quota share percentage should be gradually reduced in favor of more XOL coverage to retain greater premium and profit.

1. Recommended Approach

Most new pet insurance MGA programs use a layered reinsurance strategy:

Primary layer: Quota share — Cede 40–70% to a reinsurer for capital relief and stability during the early growth phase
Excess layer: Aggregate stop loss — Protect against portfolio-level adverse development
As program matures: Reduce quota share percentage and rely more on XOL for specific risk management

2. Impact on Your Financial Model

Include reinsurance in your financial model:

Ceded premium reduces net written premium
Ceding commissions provide revenue to the carrier
Profit sharing on favorable loss experience is additional income
Reinsurance costs are part of the overall expense structure

3. Negotiation Leverage

Understanding reinsurance gives you leverage in carrier negotiations:

Ask about the carrier's reinsurance arrangements for your program
Understand how reinsurance costs affect your ceding commission
Negotiate profit-sharing triggers that reflect the true net cost to the carrier
Propose reinsurance structure changes as the program matures

For guidance on finding and approaching fronting carriers, see our dedicated article.

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Frequently Asked Questions

Quota share reinsurance is a proportional treaty where the MGA's carrier cedes a fixed percentage (typically 30–80%) of premiums and losses to a reinsurer, reducing volatility and capital requirements while sharing profits.

Quota share shares a fixed proportion of all premiums and losses, while excess of loss only covers losses above a specific threshold (attachment point), protecting against large individual claims or catastrophic loss events.

3. Why do pet insurance programs use reinsurance?

Reinsurance reduces the fronting carrier's capital requirements, stabilizes loss ratios, provides catastrophe protection, and enables carriers to write larger pet insurance programs with more confidence.

Ceding commissions on pet insurance quota share treaties typically range from 30–38% of ceded premium, covering the MGA's acquisition and administration costs. Sliding scale commissions may adjust based on loss performance.

5. How does reinsurance affect an MGA's ceding commission from the carrier?

Reinsurance costs are factored into the carrier's expense structure, which directly influences the ceding commission offered to the MGA. More favorable reinsurance terms (lower cost, higher ceding commission from reinsurer) generally enable the carrier to offer better commission terms to the MGA.

6. What is a sliding scale ceding commission in pet insurance reinsurance?

A sliding scale ceding commission adjusts the reinsurer's commission payment based on the program's actual loss ratio performance. If losses are lower than expected, the commission increases by 3–5%; if losses are higher, it decreases. This aligns incentives between the MGA, carrier, and reinsurer.

7. Can a pet insurance MGA negotiate directly with reinsurers?

In most cases, the fronting carrier handles reinsurance negotiations directly. However, sophisticated MGAs can influence reinsurance structure by presenting strong underwriting data, loss history, and growth projections that help the carrier secure better reinsurance terms.

The transition typically occurs as the program matures and builds credible loss history, usually after 3–5 years. At that point, the carrier may reduce the quota share percentage and add or expand excess of loss layers to retain more premium while still protecting against tail risk.

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Reinsurance 101 for New Pet Insurance MGAs: Quota Share vs Excess of Loss