Treaty Reinsurance

What treaty reinsurance is

Treaty reinsurance is a long-term contract in which a primary insurer (the cedent) transfers the risks from a defined class or block of policies to a reinsurer. Instead of negotiating coverage for each individual policy, the reinsurer agrees in advance to accept a share of the cedent’s specified business for the treaty period. This arrangement reduces the cedent’s exposure, increases risk capacity, and improves financial stability during large or unusual loss events.

How it works

  • The cedent cedes a portion of a portfolio of policies to the reinsurer under a single contract covering a set term.
  • The reinsurer does not underwrite each policy individually but agrees to the terms for the whole block.
  • The treaty can specify how premiums and losses are shared or set thresholds above which the reinsurer pays.
  • Because treaties are typically multi-year, they allow both parties to plan and price risk with longer-term visibility.

Main types of treaty reinsurance

  1. Proportional (pro rata)
  2. The reinsurer assumes a fixed percentage of the ceded policies.
  3. Premiums and losses are shared in the same proportion as assumed risk.

  4. Common for quota-share and surplus arrangements (sharing both premiums and losses based on agreed percentages).

  5. Non-proportional

  6. The reinsurer pays losses that exceed a predefined limit (an attachment point) up to a cap.

  7. The cedent retains losses up to the attachment point; the reinsurer covers excess amounts.
  8. Used to protect against high-severity, low-frequency events and to stabilize capital requirements.

How treaty differs from other reinsurance forms

  • Facultative reinsurance
  • Negotiated and underwritten separately for each individual risk or policy.
  • Reinsurer may accept or reject specific risks; higher per-risk underwriting costs.

  • More transactional and selective than treaty reinsurance.

  • Excess of loss reinsurance

  • A form of non-proportional reinsurance where the reinsurer covers losses above an attachment point.

  • Can be structured for a single event, per risk, or on an aggregate basis.
  • Often used alongside treaties to provide catastrophic protection.

Benefits for the cedent (primary insurer)

  • Greater capacity to underwrite new policies without materially increasing solvency strains.
  • Improved capital efficiency and liquidity availability after major losses.
  • Smoother earnings volatility by transferring high-severity exposures.
  • Administrative simplicity when covering a homogeneous block of business.

Key takeaways

  • Treaty reinsurance transfers risk for a whole class of policies under a standing contract rather than case-by-case.
  • Proportional treaties split premiums and losses by agreed percentages; non-proportional treaties cover losses beyond set thresholds.
  • Treaty reinsurance supports insurer stability, expands underwriting capacity, and reduces transactional costs compared with facultative arrangements.
  • Excess of loss contracts are a common non-proportional tool used to cap catastrophic losses.

Conclusion

Treaty reinsurance is a foundational risk-management tool for insurers, enabling them to manage capital, stabilize results, and expand business while minimizing the need for individual negotiations on each policy. Choosing between proportional and non-proportional treaty structures — and supplementing treaties with facultative or excess-of-loss cover where appropriate — allows insurers to tailor protection to their risk profile and strategic objectives.