Treaty Reinsurance

Georgie-Boy Insurance Co. took on too much risk. Too much insurance doled out. Not to fret...Georgie-Boy will just pass the risk onto another insurance company by buying treaty reinsurance.

Treaty reinsurance is when one insurance company (the “cedent”) buys insurance from another company. (the “reinsurer”). In exchange for some money, the cedent takes on specific, predetermined risks based on the insurance policy for the reinsurer.

Just FYI: there are three types of reinsurance: treaty reinsurance, facultative reinsurance, and excess of loss reinsurance.

If this is all new to you and you feel caught off guard, just know that treaty reinsurance is more like a marriage than a fling. Treaty reinsurance is usually a long-term contract based on lots of number-crunching and risk calculations.

Treaty reinsurance contracts can either be proportional, where the reinsurer agrees to pay a percentage of policies (for which it will gain those premiums), or non-proportional, which is kind of like where the cedent pays a deductible and the reinsurer agrees to pay the rest...the amount of insurance above a specific deductible-esque amount over a specific timeframe.