Updated on October 4, 2023
Treaty Reinsurance is a form of insurance. The meaning of this term and its significance is explained here.
Definition of Treaty Reinsurance in Insurance
Treaty reinsurance is an ongoing agreement between an insurance company (insurer) and a reinsurance company (reinsurer) where the reinsurer agrees to assume a portion of the risks and liabilities associated with the insurer’s policies. A key feature of treaty reinsurance is automatic acceptance, where the reinsurer automatically takes on a predetermined portion of the insurer’s policies without the need for individual underwriting or negotiation for each policy. This simplifies the process and ensures that any policy meeting the treaty criteria is shared between the insurer and reinsurer in terms of financial responsibilities.
What is the purpose of Treaty Reinsurance?
Treaty reinsurance serves vital purposes for both insurers and reinsurers. Insurers use it to mitigate risk, ensuring they can handle large or unforeseen losses without endangering their financial stability. It also enables insurers to expand their policy offerings with the confidence that a reinsurer will share in the risk. Reinsurers benefit from treaty reinsurance by diversifying their risk portfolio. Through agreements with multiple insurers, they spread their exposure across various policies and markets, managing risk more effectively and potentially enhancing profitability.
What are the types of treaty reinsurance?
Proportional Reinsurance – In this type, the insurer and reinsurer agree to share premiums and losses in a predetermined ratio. For instance, if it’s a 50% proportional reinsurance, the reinsurer covers 50% of premiums and losses for eligible policies.
Non-Proportional Reinsurance – Also called excess of loss reinsurance, this type kicks in when losses surpass a certain threshold. The reinsurer then covers losses above this threshold, providing protection to the insurer against catastrophic events.