Treaty Reinsurance

What Does Treaty Reinsurance Mean?

Treaty reinsurance occurs when a reinsurer assumes the risk of a specific policy or group of policies from a ceding company for a designated period. Once the agreement between the reinsurer and the ceding company is legally established, the ceding company no longer needs to notify the reinsurer about each individual risk transfer, as it happens automatically.

Insuranceopedia Explains Treaty Reinsurance

One way an insurance company maintains its financial solvency is by becoming a ceding company in reinsurance.

There are two types of reinsurance. The first is facultative reinsurance, where the ceding company negotiates with a reinsurer to transfer a specific risk associated with a policy. The reinsurer then evaluates the risk and either accepts or declines it. This type of reinsurance is handled on a policy-by-policy basis. For example, if an insurance company believes that coverage for a commercial building is too costly and might jeopardize its assets, it may approach a reinsurer to share the risk as a financial safeguard. The original policy in this case would typically be a form of commercial property insurance, which covers the building, its contents, and stock against losses.

The second type is treaty reinsurance, where the ceding company transfers a risk or a group of risks associated with particular policies to the reinsurer. An example of this would be ceding all medical coverage for car insurance. In this case, whenever a car accident occurs involving the ceding company’s policyholder, the reinsurer would provide the medical coverage. The same kind of risk-sharing structure sits behind commercial auto insurance policies that cover business vehicles.