Treaty Reinsurance

What is Treaty Reinsurance?

Treaty reinsurance is a pre-agreed, standing arrangement between a cedant and one or more reinsurers that automatically covers all risks ceded within a defined class of business, without the need for individual risk submission or reinsurer approval. Once the treaty is in place, every policy that meets the treaty's scope — defined by line of business, geography, risk size, or other parameters — is automatically ceded in accordance with the treaty terms. The reinsurer is obligated to accept this business; it cannot decline individual risks within the treaty's scope.

This automatic acceptance distinguishes treaty from facultative reinsurance. Treaty reinsurance provides the cedant with certainty of capacity: as long as the cedant writes risks within the treaty parameters, reinsurance protection is guaranteed. This certainty is particularly valuable for high-volume classes where risk-by-risk placement would be impractical — motor, household, or commercial property portfolios might involve tens of thousands of risks, each of which would require individual placement if facultative reinsurance were the only option.

Treaty Structure and Scope

A treaty wording defines several critical parameters: the class or classes of business covered, the territorial scope, any excluded risk types (e.g., war, nuclear), the reinsurance structure (proportional or non-proportional), the treaty period (typically one year), and the reporting and settlement mechanics. The treaty wording is negotiated between the cedant and reinsurer (often facilitated by a reinsurance broker) and, once signed, governs the relationship for the treaty year. Changes are made by endorsement.

Treaties can be proportional (quota share or surplus share, where premium and losses are shared in an agreed ratio) or non-proportional (excess of loss or aggregate stop loss, where the reinsurer pays only above a retention threshold). Many cedants operate multiple treaties simultaneously — for example, a quota share to provide capital relief combined with a catastrophe excess of loss to cap aggregate exposure to a single event.

Treaty vs. Facultative Reinsurance

The distinction between treaty and facultative reinsurance is fundamental to reinsurance market structure. Facultative placements are negotiated individually for specific risks that fall outside treaty parameters — typically because the risk is unusually large, has hazardous characteristics, or is explicitly excluded from the treaty. Facultative placement gives the reinsurer full underwriting discretion on each risk; treaty reinsurance removes that discretion in exchange for the certainty of a consistent book of business over the treaty period.

Treaty Administration and Renewal

Treaty administration generates ongoing obligations throughout the treaty year. Cedants must submit regular bordereau reports detailing all risks ceded, corresponding premiums, and loss experience. At renewal, the cedant presents a detailed account of the portfolio's performance — premium volume, loss ratio, large loss details, and any changes in the underlying business mix. Reinsurers use this data to price the renewal and assess whether to continue participation. The quality and integrity of the cedant's data directly influences renewal terms, making accurate and comprehensive treaty reporting a commercial as well as a contractual obligation.