What treaty reinsurance is

Treaty reinsurance is the cession of risks not one by one but as a whole portfolio under a previously concluded contract. The insurer and the reinsurers agree once which classes of insurance, territories and risks are included in the program, within what limits the protection operates, and how premiums and losses are shared. Thereafter, risks that fall within the terms receive reinsurance protection without separate approval of each policy. This is the basis of any insurance company's reinsurance policy: it sets the limit of liability on a single risk and on a single event and makes the portfolio's result predictable.

How the program works

The program is concluded for a set period — most often a year, with subsequent renewal. The reinsurers participate with shares under the leadership of a leader, who determines the terms and price. During the period the cedent issues policies in the normal way, and the protection extends to them automatically. Settlements are made on periodic reports: premium and loss bordereaux, and quarterly or other agreed accounts. Large losses are reported to the reinsurer immediately, without waiting for the report — this is set out in the contract.

Forms of treaty reinsurance

By degree of obligation

  • obligatory treaty — the cedent is obliged to cede, and the reinsurer is obliged to accept, all risks falling within the terms;
  • facultative-obligatory (fac-oblig) treaty — the cedent chooses which risks to cede, and the reinsurer is obliged to accept them within the agreed limits.

By method of distributing liability

  • proportional treaties — quota share and surplus: premiums and losses are divided in agreed shares;
  • non-proportional treaties — excess of loss per risk or per event, and stop loss: the reinsurer pays part of a loss above the cedent's priority.

In practice a program often combines several forms: for example, a quota share treaty protects the portfolio as a whole, while a catastrophe excess of loss protects the insurer's retention from accumulation of losses from a single event.

Advantages and limitations

A treaty program provides automatic capacity: the insurer can accept risks within the limits without spending time on individual placements. Administrative costs fall, the financial result is smoothed, and it is easier to meet the regulator's requirements for capital adequacy and retention. For the reinsurer, a treaty is attractive because it gives access to a balanced portfolio, not only to individual large risks.

Limitations: the program covers only what the contract provides for, and risks outside its scope require facultative placement. The result depends on the quality of the cedent's portfolio and underwriting: with a high loss ratio, reinsurers tighten the terms at renewal. A treaty requires discipline in reporting and settlements.

Key terms of the contract

  • scope — classes of insurance, risk classes, territory, exclusions;
  • the cedent's retention, limits per risk and per event, and the priority in non-proportional forms;
  • reinsurance premium or rate, reinsurance commission, profit commission;
  • basis of cover — risks attaching during the contract period, or losses occurring in that period;
  • reporting and settlements — bordereaux, accounts, payment deadlines, currency, and the procedure for paying large losses;
  • term, renewal and termination procedure, and the fate of outstanding obligations.

What data is needed for a quotation

  • the composition and parameters of the portfolio: classes of insurance, distribution by sums insured and territories;
  • the period of the program and plans for portfolio development;
  • the desired structure of protection, retention and limits;
  • premium and loss statistics for several years, and information on large losses and accumulations.

How Polis Re helps

The Polis Re broker analyses the portfolio and proposes the structure of the program, prepares a presentation for the market, brings in reinsurers on the domestic and international market, negotiates at inception and renewal, and supports the exchange of bordereaux, settlements and claims settlement. Terms can be checked in the glossary. To discuss a program, send a reinsurance request.