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Treaty Reinsurance

DEFINITION of 'Treaty Reinsurance'

Mr Indra says A Reinsurance contract in which a reinsurance company agrees to accept all of a particular type of risk from the ceding insurance company. Treaty reinsurance is one of the two types of reinsurance contract, the other being facultative reinsurance. Reinsurers in a treaty contract are obliged to accept All Riski outlined in the contract.

BREAKING DOWN 'Treaty Reinsurance'

When insurance companies underwrite a new policy they are agreeing to take on additional risk in exchange for a premium. The more policies that an insurer underwrites, the more risk that it takes on. One way an insurer can reduce its exposure is to cede some of the risk to a reinsurance company in exchange for a fee. Reinsurance allows the insurer to free up risk capacity, and to protect itself from claims of high severity.
Treaty reinsurance represents a contract between the ceding insurance company and the Reinsurance in which the reinsurer agrees to accept all risks of a predetermined class over a period of time. It differs from facultative reinsurance, which is considered transactional, in that it allows the reinsurer to accept or reject individual risks. Treaty reinsurance involves a single contract covering a type of risk, and does not require the reinsurance company to provide a facultative certificate each time a risk is transferred from the insurer to the reinsurer.
By signing a treaty reinsurance contract, the reinsurer and the insurer are indicating that the business relationship is more likely to be a long-term one. The long-term nature of the agreement allows the reinsurer to plan out how to achieve a profit because it knows the type of risk it is taking on and it is familiar with the Insurance Company. This type of contract is also less expensive than Facultative Reinsurance because it is less transactional, and is less likely to involve risks that would have otherwise been rejected from reinsurance treaties.


A Reinsurance agreement used to temporarily reduce gaps in an insurer’s Treaty Reinsurance coverage. A shortfall cover is a type of facultative reinsurance, and is designed to protect the insurer if a reinsurance contract is found to have been structured insufficiently.


BREAKING DOWN 'Shortfall Cover'

When an insurance company underwrites a new policy, it is accepting the risk that a claim will be made against the policy, and in return receives a premium from the insured. The insurer can reduce its exposure to the risks created from its underwriting activities and strengthen its balance sheet by entering into a reinsurance agreement. Reinsurance shifts some or all of a risk from an insurer to a Reinsurer which serves as an insurance to insurance companies. In exchange for taking on the insurer’s risk the reinsurer receives a portion of the Premium

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Item Reviewed: Treaty Reinsurance Rating: 5 Reviewed By: EnergyRe Reinsurance Brokers