Definition
Treaty Reinsurance
Treaty reinsurance is an arrangement where the reinsurer automatically accepts a defined share of all risks within an agreed class written by the insurer.
Under a treaty, the insurer and reinsurer agree in advance on the terms, and individual risks within the covered class are ceded automatically without case-by-case negotiation, giving the insurer certainty of cover and capacity. Treaties may be proportional (sharing premiums and losses in a fixed ratio) or non-proportional (excess-of-loss, covering losses above a threshold).
Treaty reinsurance suits high-volume, homogeneous portfolios such as motor or term life. It is efficient and reduces administrative effort compared with negotiating each risk, and is the backbone of most insurers' reinsurance programmes.
Related terms
- ReinsuranceReinsurance is insurance for insurers, where a reinsurer assumes part of the risk an insurer has underwritten in exchange for a share of the premium.
- Facultative ReinsuranceFacultative reinsurance is the case-by-case reinsurance of a single, often large or unusual, risk that falls outside or above the insurer's treaty arrangements.
- RetentionRetention is the portion of a risk an insurer keeps on its own books rather than ceding to reinsurers.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.