• In essence Clean-cut Quota Share Reinsurance Treaties are proportional treaties that cede business on a financial year basis and in their purest form are associated with incoming and outgoing premium and claim portfolios.
• Thus, if one reinsurer is to be relieved of its liability under the treaty at an anniversary date, it will be debited with an amount representing the unearned premium in the last account of the year. The new reinsurer who takes over the business for the subsequent year is credited with the premium which has thus been withdrawn from the previous reinsurer. The effect of this transaction is to release the previous reinsurer from any liability in respect of the unexpired portion of the risks which were accepted in the preceding year and the new reinsurer accepts this liability. The new reinsurer will then assume the liability for all claims which might arise in the current year until the anniversary date on the running off of the old risks.
• Any losses that had occurred that have not yet been paid (outstanding losses) should be estimated and settled with the outgoing reinsurers and be passed to the new reinsurers who will then become responsible for paying the claims when they are eventually settled.
• Any loss' limits and ceding commissions should be considered.
• It should be assessed the full terms of the contract and the impact in terms of the cash-flows as all the cash-flows required to settle the obligations need to be projected, as required under Articles 41 and 42 of the Comission Delegated Regulation (EU) 2015/35 and Articles 81 and 77 of the Solvency directive (valuation of assets and liabilities).
• The expected present value of the cash-flows shall be calculated using the relevant risk-free rate term structure and adjustments should be made to take account of expected losses due to default of the counterparty.
• Example:
o   The reinsurance treaty covers the period from 1st September 2015 to 31st December 2016
o   Assume the insurance undertaking was notified of a claim before 1st September 2015
o   Assume the claim reserve on 1st September 2015 is 100 EUR
o   Assume the insurance undertaking pays the claim during November 2015, but pays more than the provision: 110 EUR
o   The claim is settled, hence the claim reserve on 31st December 2016 is 0 EUR
Taking into account the quota-share of 50%, the reinsurance undertaking would pay: 50% x (110 – 100 + 0) = 5 EUR