What is Treaty Reinsurance?

Treaty reinsurance is when an insurance company buys insurance from another insurer. The insurer who sells the insurance is called the cedent, and they transfer all the risks of a certain type of policies to the buying company, which is the reinsurer.

There are three main types of reinsurance contracts: treaty reinsurance, facultative reinsurance, and excess of loss reinsurance.

Learn more about Treaty Reinsurance

Treaty reinsurance is an agreement between an insurance company and a reinsurer. The reinsurer agrees to take on the risks of a specific group of policies for a set period of time.

When insurance companies underwrite a new policy, they agree to take on additional risk in exchange for a premium. The more policies an insurer underwrites, the more risk it assumes. One way an insurer can reduce its exposure is to cede some of the risk to a reinsurance company in exchange for a fee. Reinsurance allows the insurer to free up risk capacity and to protect itself from high severity claims.

When the reinsurer signs a treaty reinsurance contract, it shows that they are willing to cover all the risks involved, even if they don’t underwrite each individual policy right away. This agreement also indicates a long-term business relationship between the reinsurer and the ceding insurance company. This long-term nature allows the reinsurer to carefully plan and make a profit, as they are aware of the risks involved and are familiar with the ceding company.

Treaty reinsurance contracts can be categorized as either proportional or non-proportional. In proportional contracts, the reinsurer agrees to cover a certain percentage of policies and receive the corresponding proportion of premiums. If a claim is made, the reinsurer will also pay the stated percentage. On the other hand, in non-proportional contracts, the reinsurance company agrees to pay claims only if they surpass a specified amount within a specific timeframe.


Treaty reinsurance provides additional protection for the ceding insurer’s equity and enhances stability during unexpected or significant events by safeguarding against specific risks.

Reinsurance enables insurers to provide coverage for a greater number of risks without significantly increasing the costs of maintaining solvency margins. Additionally, reinsurance provides insurers with a significant amount of liquid assets to handle unexpected losses.


Treaty reinsurance: Great for spreading risk, but watch out for these downsides:

  • Flexibility Constraints: It offers a strong safety net, but it does come with some limitations. Insurers have to work within the boundaries of the agreement, which restricts their flexibility in customizing terms for individual risks.
  • Cost Considerations: The financial side of treaty reinsurance can be quite puzzling. Premiums are usually determined by the agreement’s terms rather than the actual losses suffered. This can result in insurers paying more than anticipated, similar to buying a resort package but only utilizing a small portion of its amenities.
  • Risk Coverage: Treaty reinsurance, although extensive, is not an invincible stronghold. It might not protect against all kinds of risks, leaving insurers vulnerable in specific domains.