Definition
A treaty in the context of reinsurance refers to a formal agreement between a ceding company and a reinsurer where the reinsurer agrees to indemnify the ceding insurer for a portion of the claims arising from insurance policies the latter issues.
Key Components
Ceding Company: This is the primary insurer that originally wrote the insurance policies. In a treaty, the ceding company passes on part of the risk associated with these policies to the reinsurer.
Reinsurer: The organization that assumes a part of the risk from the ceding company under the terms of the treaty agreement.
Proportional/Non-Proportional Agreement: Treaties can be categorized generally into proportional treaties, where risks and premiums are shared proportionally, and non-proportional treaties, where reinsurers cover losses above a specified amount.
Governing Regulations
Most reinsurance treaties are governed by national laws relevant to insurance; however, international governing bodies may involve in multi-country reinsurance treaties. Key regulations include functionalities like treaty duration, disputes resolution, and termination procedures. References can be seen in the Reinsurance (Acts of Terrorism) Act 1993 and related provisions in commercial law.
Importance in Insurance
A treaty helps an insurance company manage risk better by securing a backup from a reinsurer, thus stabilizing its financial position especially when faced with large claims. It offers ways to share premiums and risks which would be too large for a single insurer to handle efficiently alone.
External References
- NAIC’s Reinsurance FAQs guide NAIC’s Guide Link
- State-specific reinsurance regulations
It is beneficial to consult regional insurance statute books or legal counsel for specific rules applicable in your jurisdiction.
