What is Treaty Reinsurance?
Treaty reinsurance is an automatic reinsurance arrangement under which a reinsurer agrees in advance to accept all risks of a defined class written by a ceding insurer during the treaty period — as opposed to facultative reinsurance, which requires the reinsurer to individually assess each risk — providing the cedant with automatic capacity and predictable aggregate protection.
Treaty reinsurance underpins the capacity of most insurance carriers and MGAs to write business at scale. Rather than negotiating reinsurance terms for each individual risk, a treaty covers an entire portfolio or class of business automatically, giving the ceding insurer certainty about how its exposure will be shared with the reinsurer during the treaty period (typically 12 months, renewing January 1 or July 1 for most US programs).
The two principal treaty structures are proportional and non-proportional. Under a proportional treaty (quota share or surplus share), the reinsurer participates in every risk at a fixed percentage, sharing both premium and losses pro-rata. Under a non-proportional treaty (excess of loss or catastrophe XL), the reinsurer only responds once aggregate or per-occurrence losses exceed a specified retention (the "attachment point"), providing protection against large individual losses or accumulated catastrophe events.
For MGAs operating under delegated authority, treaty reinsurance monitoring is critical. The DUA typically specifies the reinsurance structure that backs the program, and the MGA's underwriting decisions directly affect the reinsurance treaties of both its capacity carrier and, in some cases, its own facultative or program-specific treaties. Overconcentration in a CAT-exposed geography, for example, can exhaust treaty limits and force the MGA to refer additional risks or stop writing in that territory.
Treaty negotiations between cedants and reinsurers involve complex actuarial analysis of the ceded portfolio — loss development patterns, catastrophe exposure modelling, rate adequacy, and portfolio composition. Key treaty terms include the attachment point, limit, rate on line (ROL), ceding commission (for proportional treaties), loss corridors, and reinstatement provisions.
Reinsurance treaties are typically placed through specialist reinsurance brokers at market centres including London (Lloyd's and the IUA companies market), Bermuda, Zurich, and Munich.
Orb's treaty monitoring agent runs in parallel with every submission, checking the risk being evaluated against the MGA's current treaty utilisation and geographic aggregation limits. If a new submission would push the portfolio toward a treaty aggregate trigger or concentrate exposure in a CAT zone approaching a pre-defined threshold, the agent flags this in the decision memo before bind — giving underwriters the information they need to manage treaty compliance in real time rather than discovering the issue during the next bordereaux cycle.
Frequently asked questions
What is the difference between treaty and facultative reinsurance?
Treaty reinsurance covers an entire book of business automatically for a defined period; the reinsurer cannot pick and choose individual risks. Facultative reinsurance covers a single, individual risk that the reinsurer reviews and prices separately. Facultative is used for large, unusual, or high-value risks that fall outside treaty parameters or require limits beyond what the treaty provides.
What is a quota share treaty?
A quota share is a proportional treaty where the reinsurer accepts a fixed percentage of every risk in the ceded class, receiving the same percentage of premium and paying the same percentage of losses. For example, a 30% quota share means the reinsurer gets 30% of premium and pays 30% of every loss. Quota shares also provide capital relief, as they reduce the cedant's net retained premium and required surplus.
How are treaty reinsurance renewals priced?
Renewal pricing is driven by the ceded portfolio's loss experience, current market conditions, and catastrophe modelling. Reinsurers evaluate loss development, IBNR adequacy, rate adequacy of the underlying book, and exposure changes since the prior treaty period. After years of elevated CAT losses, reinsurance pricing hardened significantly in 2023–2024, particularly for property catastrophe XL treaties.