Legal Definitions - reinsurance treaty

A reinsurance treaty is a long-term contract between two insurance companies. Under this agreement, one insurer (known as the "ceding insurer" or "reinsured") agrees to transfer a specific portfolio or category of risks to another insurer (the "reinsurer").

Unlike agreements for individual policies, a reinsurance treaty automatically obligates the reinsurer to accept a predetermined share of all risks that fall within the defined category of business. This allows the ceding insurer to manage its overall risk exposure across many policies efficiently. Instead of receiving details for each individual policy or claim, the reinsurer typically receives periodic summary reports about the covered losses.

Here are some examples illustrating how a reinsurance treaty works:

• Cyber Liability Insurance: A regional insurance company specializes in providing cyber liability insurance to small and medium-sized businesses. While profitable, a single widespread cyberattack could lead to numerous claims simultaneously, potentially exceeding the company's financial capacity.

  To manage this systemic risk, the regional insurer enters into a reinsurance treaty with a larger global reinsurer. This treaty specifies that the reinsurer will automatically cover 50% of all cyber liability claims exceeding a certain threshold (e.g., $100,000) for all policies issued by the regional insurer within a particular year. The regional insurer doesn't need to ask the reinsurer for approval on each policy; the treaty pre-approves the transfer of risk for this entire class of business. The reinsurer then receives monthly reports detailing the total claims paid under this arrangement.

• Health Insurance: A health insurance provider offers various plans to individuals and employers. While most claims are routine, a small number of policyholders may incur extremely high medical costs due to chronic illness or catastrophic accidents, which could significantly impact the insurer's profitability.

  The health insurance provider establishes a reinsurance treaty with a specialized health reinsurer. This treaty dictates that the reinsurer will automatically cover 80% of any individual claim that exceeds $500,000 across all the health plans offered by the provider. This arrangement allows the primary insurer to confidently offer comprehensive coverage without bearing the full financial burden of the most expensive claims. The reinsurer receives quarterly aggregated data on high-cost claims rather than individual patient files.

• Marine Cargo Insurance: An insurance company specializes in insuring large shipments of goods transported by sea. A single vessel carrying high-value cargo could represent a substantial loss if it sinks or is damaged.

  To mitigate the risk associated with these high-value shipments, the marine cargo insurer enters into a reinsurance treaty. This treaty stipulates that the reinsurer will automatically assume a 40% share of the risk for all cargo shipments valued over $10 million that the primary insurer covers. This means the primary insurer doesn't have to negotiate reinsurance for each individual high-value cargo policy; the treaty provides continuous, automatic coverage for this specific class of business. The reinsurer receives periodic summaries of the total insured values and any claims arising from these large shipments.