Treaties are agreements that cover broad groups of policies such as all of a primary insurer’s auto business.
In most treaty agreements, once the terms of the contract, including the categories of risks covered, have been established, all policies that fall within those terms – in many cases both new and existing business—are covered, usually automatically, until the agreement is cancelled.
Types of Treaty Reinsurance
- Pro Rata
It is a form of reinsurance in which the reinsurer shares a proportional part of the original losses and premiums of the ceding company. Pro rata forms are often used in property insurance, since this form provides catastrophic protection in addition to individual risk capacity.
- Quota Share
Quota share reinsurance is a form of pro rata reinsurance whereby the ceding company is indemnified for a fixed percent of loss on each risk covered by the treaty contract. All liability and premiums are shared from the first dollar. “Quota” or “definite” share relates to the fixed percentage as stated in the treaty.
- Surplus Share
Under a surplus share type of treaty, the pro rata proportion ceded depends on the size and type of risk. The ceding company has the right to decide how much it wants to retain on any one risk. This retention is called a “line.” Any risk that falls within this retention or line is handled totally by the primary company. Whenever the company insures a risk that is larger than the retention, the amount over the retention is ceded to the surplus share treaty as a multiple of the retention. All losses between the insurer’s retention on the risk and reinsurer’s participation are pro rated.
- Excess of Loss
In pro rata type treaties, the operative word is “sharing.” The ceding company and reinsurer share premium and losses according to a predetermined percentage.