Treaty Reinsurance
Treaty reinsurance is a standing reinsurance arrangement in which a reinsurer agrees in advance to accept a defined category of risks ceded by a primary insurer over a specified policy period, obligating both parties to honor the terms for all qualifying business without individual risk-by-risk negotiation.
Unlike facultative reinsurance, which requires separate negotiation for each individual risk, treaty reinsurance is an automatic and obligatory arrangement. The primary insurer — the cedent — and the reinsurer agree upfront on the types of risks covered, the attachment points, the sharing percentages, the premium structure, and the policy period, typically one calendar year. Once the treaty is in force, every qualifying policy written by the cedent is automatically ceded to the reinsurer according to the treaty terms, with no need for individual approval.
The automatic nature of treaties provides cedents with certainty of capacity. A property insurer writing thousands of homeowners policies, for example, knows before binding any coverage that its catastrophe exposure will be limited by the treaty structure. This certainty is essential for pricing: cedents cannot charge adequate premiums without confidence that excess losses above a defined threshold will be absorbed by a reinsurer.
Treaties are either proportional or non-proportional. In a quota share treaty, the reinsurer takes a fixed percentage — say 40% — of every premium and every loss in the covered portfolio. This structure is commonly used by smaller cedents that need capital relief and ceding commissions to offset their expense ratios. In an excess-of-loss treaty, the reinsurer only pays losses that exceed the cedent's retention per occurrence (per-risk or per-event) or in aggregate over the treaty period.
From the reinsurer's perspective, treaties provide volume and diversification but also concentration risk if the cedent's book is geographically or sectorally concentrated. Reinsurers conduct detailed underwriting reviews — inspecting the cedent's portfolio composition, historical loss experience, reserving adequacy, and management quality — before committing to treaty terms. Annual treaty renewals, especially those brokered on January 1 for North American property catastrophe risks, are closely watched market events.
For analysts following publicly traded reinsurers, treaty renewals produce rate data that provides early evidence of pricing cycle direction. Large reinsurers report rate-on-line changes — the change in reinsurance premium as a fraction of the limit purchased — as a leading indicator of underwriting margin trajectory in the quarters ahead.