Treaty Reinsurance

Treaty reinsurance is a type of reinsurance agreement in which one party, the ceding company, agrees to transfer a portion of its insurance risk to another party, the reinsurer. The ceding company typically retains a portion of the risk, known as the retention, and the reinsurer assumes the remaining risk.

Treaty reinsurance is often used by insurance companies to manage their risk exposure and to improve their financial stability. By transferring a portion of their risk to a reinsurer, insurance companies can reduce their overall capital requirements and improve their risk-adjusted return on equity.

Treaty reinsurance can also be used to provide insurance companies with access to new markets and to expand their product offerings. By entering into a treaty reinsurance agreement with a reinsurer that has a strong presence in a particular market, an insurance company can gain access to new customers and sell new products.

There are two main types of treaty reinsurance: proportional and non-proportional. In a proportional treaty reinsurance agreement, the reinsurer assumes a pro rata share of the ceding company's risk. For example, if the ceding company has a retention of $1 million and the treaty reinsurance agreement provides for a 50% ceding commission, the reinsurer will assume a $500,000 share of the risk.

In a non-proportional treaty reinsurance agreement, the reinsurer assumes a fixed amount of risk, regardless of the size of the claim. For example, a non-proportional treaty reinsurance agreement might provide for the reinsurer to assume all claims in excess of $1 million.

Treaty reinsurance can be a valuable tool for insurance companies to manage their risk exposure and to improve their financial stability. However, it is important to carefully consider the terms of any treaty reinsurance agreement before entering into it.