Treaty Reinsurance

Treaty reinsurance is a standing contract in which a reinsurer agrees, in advance, to accept a defined share of an insurer's entire book of business — for example, all of its workers' compensation or commercial property policies. Unlike facultative coverage, the reinsurer does not review each risk; it is obligated to take every policy that meets the treaty's terms. This makes treaty the workhorse of the reinsurance market, giving carriers automatic, predictable capacity so they can bind everyday accounts quickly and confidently.

For a small-business buyer, treaty reinsurance is the reason ordinary policies get issued fast and at stable prices. Because the primary insurer knows its treaty will absorb part of every loss, it can quote and bind without special approval for each account. Treaties come in two families: proportional (quota-share or surplus-share, where premium and losses split by a set percentage, usually with a ceding commission) and non-proportional excess-of-loss (the reinsurer pays only above an attachment point). The mix a carrier chooses affects how much surplus it must hold and, indirectly, the rates it charges.

A practical nuance is that treaties are renegotiated periodically — often annually at January 1 — and their cost is a major driver of primary market cycles. When reinsurers raise treaty pricing after heavy catastrophe losses, primary carriers face a hard market and pass increases to policyholders even when individual accounts are loss-free. Carriers still keep facultative reinsurance available for risks that exceed treaty limits or hit treaty exclusions, so the two structures work in tandem rather than as substitutes.