Treaty Reinsurance

Under a treaty, the insurer automatically transfers, or cedes, the agreed risks to the reinsurer, and the reinsurer must accept them, within the treaty's terms. Neither side reviews each policy separately.

Treaties can be proportional, where the reinsurer takes a fixed share of premiums and claims, such as 40% of every policy in the portfolio, or non-proportional, where the reinsurer pays losses above a set amount, such as all losses from a single catastrophe above 50,000,000 up to 300,000,000.

For example, a home insurer might have a treaty under which a reinsurer automatically covers 30% of all its household policies, receiving 30% of the premiums and paying 30% of the claims.

Treaty reinsurance is efficient for insurers writing large numbers of similar policies, giving them stable, predictable protection and allowing them to write more business than their own capital would support. Treaties are usually renewed annually. They differ from facultative reinsurance, which covers individual risks one at a time.