WHAT IS TREATY REINSURANCE

Treaty reinsurance encompasses a portfolio of business of the insurer where they negotiate in advance for an automatic reinsurance facility. When the reinsured (i.e. the original insurer) can guarantee or expects to produce a certain volume of business of a particular kind, he negotiates in advance, with the reinsurers for an automatic reinsurance, facility which is called a Treaty. Once the facility is finalized, the original insurer is automatically reinsured in respect of all risks or polices which fall within the terms and conditions of the agreement.

Treaty reinsurance is an agreement between the original insurer and reinsurer whereby both parties are automatically bound well in advance as regards all the risks that fall within the terms of the agreement.

There are two main methods in use under Treaty Reinsurance namely:

• Proportional; and
• Non proportional
  

PROPORTIONAL TREATY

In proportional reinsurance, the insurer and the reinsurer apportion the sums insured, premiums and losses in a contractually agreed ratio.
“The company hereby agrees to cede to the reinsurer and the reinsurer agrees to accept by way of reinsurance a share of all insurance underwritten direct by the company, or accepted in coinsurance or by way of facultative reinsurance from local companies, in the lines of business covered at the terms and conditions and within the territorial scope set out in the special condition”.

The type and limits of this treaty are set out in the special conditions.

QUOTA SHARE TREATY

Quota share treaty is an arrangement whereby the reinsured agrees obligatorily to cede and the reinsurer agrees obligatorily to accept a fixed percentage of each and every risk accepted by the reinsured.

Consequently the reinsurer receives a fixed proportion of the losses incurred. The reinsurer may be advised of the cession using bordereaux prepared by the cedants.The premium payable under Quota treaty is as per original rate. The reinsurers usually pay the cedent reinsurance commission.

Quota share treaties are mostly used by small or new companies which can obtain adequate reinsurance covers only by offering attractive business

SURPLUS TREATY

As the name implies, surplus treaty is a contract whereby the reinsurer participates only after the gross retention of the ceding company is exceeded.
The reinsurer therefore undertakes obligatorily to accept any amounts up to an agreed limit being the surplus of the cedant’s retention. The retention of the cedant is known as one line and the treaty limit may be say 20 lines.

The premium for the risk will have to be ceded in the proportion as the sum insured,. Similarly a claim under the policy will have to be a portioned in the same proportion.

The main advantages with surplus reinsurance is that it allows the ceding company to retain a larger volume of premium that it could possibly under the quota share arrangement. It has a fixed amount on every risk and limits its liability accordingly.

NON-PROPORTIONAL TREATY

WORKING EXCESS OF LOSS

This term is usually applied to that layer of excess of loss reinsurance where a number of losses are expected each year. A working excess of loss arrangement is usually placed with the reinsurer by means of a treaty for a portfolio of business. However, it can also be a facultative arrangement.

This type of reinsurance is arranged to protect the insurer against a major loss arising either by way of an accumulation of losses from one event or from one single large loss.

Today most catastrophe treaties will apply a two risk warranty in that two or more risks must be involved in the same loss before it will respond to the claim. Excess of loss contracts are arranged to protect a whole account for a period of time.

Catastrophe Excess of Loss

This type of reinsurance is arranged to protect the insurer against a major loss arising either by way of an accumulation of losses from one event or from one single large loss. Today most catastrophe treaties will apply a two risk warranty in that two or more risks must be involved in the same loss before it will respond to the claim.

STOP LOSS

This type of reinsurance is sometimes referred to as aggregate excess of loss and excess of loss ratio. It is designed to protect a class of business from severe fluctuation in result. The reinsurer will not be liable until the loss ratio for the year reaches an agreed percentage of the premiums, Thereafter the reinsurer is responsible for all losses up to the limit of the treaty, This form of reinsurance is commonly used for such classes as crop insurance retrenchment and redundancy covers where results can vary greatly from year to year.