Treaty Reinsurance is a pre-negotiated agreement between the primary and the reinsurer. Under this method, there is an arrangement between the ceding company and reinsurer that amount of insurance on a policy above the retention of the ceding company shall be submitted for reinsurance and the same shall be accepted by the insuring company.
The primary insurer agrees to cede all risks within a defined class or classes to the reinsurer. In return, the reinsurer agrees to provide reinsurance on all risks ceded without individual underwriting. “Underwriting” is done during the negotiation of the treaty contract, thus none is done at the time of a session. It represents a contract between the ceding insurance company and the reinsurer, in which the reinsurer agrees to admit all risks of a predestined class over a period of time.
Common types of Treaty Reinsurance are – Quota Share, Surplus, Excess of Loss, Excess of Loss Ratio (Stop-Loss), and Pools etc.
Some key points:
- With treaty reinsurance, the reinsurance company covers all risks in a certain category after a deal is negotiated.
- As soon as the original contract is completed the excess above retention amount becomes automatically reinsured under the agreement.
- The important feature here is that if sessions are made as per terms of the treaty the reinsures cannot refuse to accept.
