What treaty reinsurance is
Treaty reinsurance is a contract between an insurer (the cedent) and one or more reinsurers covering a defined book of business rather than individual policies. Every policy that falls within the treaty's scope is reinsured automatically, without being submitted for separate approval. This makes treaties the backbone of most insurers' reinsurance programs, while facultative reinsurance handles risks that fall outside them.
Why insurers buy treaties
- Capacity: the insurer can write larger policies and more business than its own capital supports.
- Stability: excess of loss and catastrophe treaties smooth results after large losses or natural disasters.
- Capital relief: ceding part of the risk can reduce required capital under US risk-based capital rules, Solvency II in Europe or the Bermuda solvency framework.
- Expertise: reinsurers share pricing data, wording standards and claims know-how.
Main treaty structures
| Structure | How it works |
|---|---|
| Quota share | A fixed percentage of every policy is ceded |
| Surplus | Only the amount above the insurer's retention is ceded, in "lines" |
| Per risk excess of loss | Pays above a retention for each individual risk loss |
| Catastrophe excess of loss | Pays above a retention for all losses from one event |
| Stop loss / aggregate | Pays when the annual loss ratio or total losses exceed a threshold |
The first two are proportional; the rest are non-proportional.
Obligatory nature and attachment basis
Most treaties are obligatory: the cedent must cede and the reinsurer must accept all business within scope. Treaties attach either on a risks-attaching basis (policies written during the treaty year are covered for their full term) or a losses-occurring basis (losses that happen during the treaty period are covered regardless of when the policy was written). Getting this right avoids gaps at renewal.
Renewal calendar and placement
Treaties usually run for twelve months and cluster around market renewal dates: January 1 is the largest, with a focus on Europe, Asia Pacific outside Japan, casualty and specialty; April 1 is dominated by Japan; June 1 by Florida property catastrophe programs; and July 1 by other US business. A lead reinsurer sets price and terms, and other reinsurers fill out the panel. Placements are typically arranged through reinsurance intermediaries, and Lloyd's syndicates, Bermuda carriers, European groups and Asian reinsurers often share the same program.
Security, collateral and regulation
A US cedent takes statutory credit only for reinsurance that meets state credit-for-reinsurance law. The NAIC's 2019 revisions to its Credit for Reinsurance Model Law, which implemented the covered agreements with the EU and the UK, allow qualifying reinsurers from reciprocal jurisdictions to post no collateral. Other unauthorized reinsurers usually secure obligations with trust funds or letters of credit. See the NAIC covered agreement page for background.
Key clauses to review
- Definitions of loss occurrence, ultimate net loss and hours clauses for catastrophes
- Follow-the-fortunes and follow-the-settlements provisions
- Reporting, premium and loss bordereaux, and audit rights
- Arbitration, insolvency, offset and commutation clauses
- Sanctions, cyber and communicable-disease exclusions
Working with Polis Re
Polis Re supports treaty placement and review: we help prepare underwriting data and connect cedents with licensed reinsurance intermediaries and authorized reinsurers. Start with a request or contact us.