Can anyone explain how this works please. I understand that in a quota share, the claims and premiums are shared in the same proportions but what happens when there is a limit on the amount that can be recovered by the insurer. Does that mean that the proportion of claims ceded ends up being lower than the proportion of the premium that was ceded?
That's right - but notice that in the question the limit is being increased. There may also be knock-on effects, eg commissions, contingencies, competition, etc, so the overall effect on the net loss ratio is uncertain. In practice, clauses like this are pretty rare.
