Treaty Reinsurance Explained: 2025 Guide with Types and Pricing Insights

Julia Kagan is a financial and consumer journalist, previously serving as the senior editor for personal finance at Investopedia.

What Is Treaty Reinsurance?

Treaty reinsurance is a strategic arrangement where one insurance company (the cedent) transfers a portfolio or class of insurance policies to another insurer (the reinsurer) to share the associated risks. This contract spans a defined period and covers all policies within the agreed category.

It stands as one of the three primary types of reinsurance contracts, alongside facultative reinsurance and excess of loss reinsurance.

Key Highlights

• Treaty reinsurance involves an insurer purchasing coverage from another insurer to manage risk.
• The cedent cedes risk to the reinsurer, who assumes it in exchange for premiums.
• This arrangement enhances the cedent’s financial security and stability during significant or unexpected claims.
• There are two main treaty reinsurance contract types: proportional and non-proportional.
• Treaty reinsurance is generally less transactional and involves fewer rejected risks compared to facultative reinsurance.

How Treaty Reinsurance Works

The treaty reinsurance contract commits the reinsurer to accept all risks within a specified category from the cedent over the contract duration. When an insurer issues new policies, it inherently assumes risk; treaty reinsurance allows it to transfer some of this risk to a reinsurer, thereby freeing capacity and protecting against large losses.

Unlike facultative arrangements where each policy is individually considered, treaty reinsurance covers all policies in the agreed class, fostering a long-term partnership. This ongoing relationship enables the reinsurer to forecast profitability by understanding the risk profile and the cedent's underwriting practices.

Proportional treaties require the reinsurer to share premiums and losses at a fixed percentage, while non-proportional treaties activate only when losses exceed a set threshold within a time frame.

Benefits of Treaty Reinsurance

Treaty reinsurance provides the cedent with robust protection against a broad range of risks, offering enhanced equity security and operational stability during catastrophic events. It also empowers insurers to underwrite more policies without disproportionately increasing solvency costs, ensuring liquidity is maintained for exceptional claims.

Comparing Treaty, Facultative, and Excess of Loss Reinsurance

Treaty reinsurance differs significantly from facultative reinsurance, which involves individual risk assessment and acceptance. Facultative contracts are negotiated separately for each risk, making them more costly and transactional.

In contrast, treaty reinsurance covers entire portfolios under a single contract, reducing administrative expenses and minimizing risk rejection.

Excess of loss reinsurance is a non-proportional form where the reinsurer covers losses exceeding a specified amount. Unlike treaty and facultative types, it focuses on loss thresholds rather than sharing premiums and losses proportionally.

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