Reinsurance treaty
Also known as: treaty reinsurance
A reinsurance treaty is a standing agreement in which a reinsurer automatically accepts an agreed share of all risks of a defined class written by the ceding insurance company, rather than evaluating each policy individually.
A reinsurance treaty is a contract between two insurance companies: the ceding insurer, which originally writes the policies, and the reinsurer, which agrees to take on part of the risk. Under a treaty arrangement, the reinsurer automatically accepts its agreed share of every risk within a defined class or block of business — for example, all whole life policies the ceding company issues — without underwriting each policy one by one.
Treaty reinsurance is one of the two broad forms of reinsurance. The other, facultative reinsurance, is negotiated risk by risk: the ceding company offers an individual policy (often a large or unusual one) and the reinsurer may accept or decline it. The treaty form trades that case-by-case control for efficiency and certainty — the ceding insurer knows in advance that qualifying business is covered, and the reinsurer receives a steady flow of premium.
Reinsurance matters because it lets an insurer write more business than its own capital could safely support. By ceding part of each risk, the company stabilizes its loss experience, protects itself against catastrophic claims, and increases its capacity to issue new policies. The original policyholder is unaffected: the ceding insurer remains fully responsible for paying claims, and the reinsurance operates entirely between the two companies.
State life and health insurance licensing exams cover reinsurance under general insurance concepts and sources of insurance. Know the roles of the ceding insurer and reinsurer, and be able to distinguish automatic treaty reinsurance from case-by-case facultative reinsurance.
Key takeaways
- A reinsurance treaty automatically covers an agreed share of all risks in a defined class written by the ceding insurer.
- Treaty reinsurance contrasts with facultative reinsurance, which is negotiated policy by policy.
- Reinsurance stabilizes losses, protects against catastrophes, and expands an insurer's capacity to write business.
- The ceding insurer remains fully responsible to its policyholders; reinsurance operates between the companies.
- Life and health licensing exams test the treaty vs. facultative distinction and the roles of each party.