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Treaty Reinsurance

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Treaty Reinsurance

In treaty reinsurance, the ceding company is contractually bound to cede and the reinsurer is bound to assume a specified portion of a type or category of risks insured by the ceding company. Treaty reinsurers, do not separately evaluate each of the individual risks assumed under their treaties and, consequently, after a review of the ceding company's underwriting practices, are dependent on the original risk underwriting decisions made by the ceding primary policy writers.

Such dependence subjects reinsurers in general, to the possibility that the ceding companies have not adequately evaluated the risks to be reinsured and, therefore, that the premiums ceded in connection therewith may not adequately compensate the reinsurer for the risk assumed.

The reinsurer's evaluation of the ceding company's risk management and underwriting practices as well as claims settlement practices and procedures, therefore, will usually impact the pricing of the treaty.

Types of Treaty Reinsurance

Treaties are classified as proportional and non-proportional.

Proportional Treaty:
The two companies share the premium as well as risk. The reinsurer usually pays a ceding commission.

Pro-RataTreaty: It is a classification based on the way the two companies share the risk. The cedent and the reinsurer share a pre decided percentage of the premium and losses. It is used widely as it provides surplus protection. There are two types of pro-rata reinsurance, quota share and surplus share.

Quota Share Pro-Rata Treaty: The primary insurer cedes a fixed percentage of premiums and loses for every risk accepted.

Surplus Share Pro-Rata Treaty: It is different in that not every risk is ceded but only those that exceed certain predetermined amounts.

Non-Proportional Treaty: As the name suggests it is not proportional and the reinsurer only responds if the loss suffered by the insurer exceeds a certain amount.

Excess of Loss: It covers a single risk or a certain type of business. Catastrophe reinsurance is a type of excess of loss reinsurance. It provides the captive with a great deal of flexibility.

Stop Loss Treaty: It covers the whole account and is also known as excessive loss ratio reinsurance.

Lines of Business

  • Accident & Health
  • Casualty
  • Construction and Engineering
  • Energy (On-shore & Off-shore)
  • Fire
  • Marine Hull
  • Motor Fleet
  • Personal Indemnity
  • Property
  • Space

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