What Does Treaty Reinsurance Mean?
Treaty reinsurance is when the reinsurer takes on a risk of
a particular policy or a group of policies from a ceding company for a period
of time. When the agreement between reinsurer and the ceding company is legally
forged, the latter no longer notifies the former about risk transfer and is
Insuranceopedia Explains Treaty Reinsurance
One way in which an insurance company maintains its financial solvency is by becoming a ceding company in reinsurance.
There are two types of reinsurance. The first one is facultative reinsurance. The ceding company negotiates with a reinsurer about transferring a risk regarding a policy. The reinsurer studies it and either receives or declines the risk. It is a policy-to-policy basis. For instance, if an insurance company thinks that coverage for a commercial building is too expensive and may threaten its assets, then the company calls on a reinsurer to share the risks as a financial safeguard.
The other one is the treaty reinsurance. The ceding company transfers a risk or a group of risks of a particular policy to the reinsurer. An example would be ceding all medical coverage for car insurance. Every time a car accident happens involving the policyholder of the ceding company, the reinsurer will provide for the medical coverage.