Treaty reinsurance was developed to overcome the difficulties associated with having to place risks individually through facultative reinsurance. Treaty reinsurance is an arrangement where one or more reinsurers agree to automatically accept all reinsurance which falls within predetermined parameters. The reinsurer is obliged to accept all risks which fall under the terms of the treaty.
The treaty wording will specify the class of insurance business involved (for example, property damage), as well as the type and share of risks that will be ceded. An insurer will usually have a number of treaties covering the different types of business underwritten.
The key benefit of treaty reinsurance is that the insurer knows in advance that it can reinsure most of the risks which it wishes to accept from its’ own proposers, provided that the risks fall within the treaty arrangements.
