Roles of Reinsurance of Treaty|
What is Reinsurance of Treaty?
For any existing contract to be valid, there must be a written agreement between the parties to that particular contract. However, the “Treaty” ordinarily means a contractual or written agreement between two or more subjects or countries in which they unanimously agreed to assist each other when the need arises. ( It can often be described as an agreement between an insurer and a reinsurer pointing out the types or classes of businesses that the reinsurer will accept from the insurer).
Also, “Reinsurinsurance” ordinarily means an insurance practice by which the present insurer withdraws himself from the risk and pushes it upon another insurer. Therefore, reinsurance means to insure for risk that has already been insured.
Reinsurance of treaty is an agreement between the ceding company and reinsurer where the ceding company agrees to cede and the reinsurer agrees to accept all reinsurances offered within the limits of the treaty. Those limits can be monetary, geographical, branch and section.
This implies that automatic protection is secured; It is obligatory for the ceding to cede risks in accordance with the terms of the treaty and it is also obligatory for the reinsurer to accept all the risks within the scope of the treaty. Thus, the ceding company can give cover immediately for any proposal, that it wishes to accept and which is within the limitation of the treaty.
Under treaty reinsurance, the reinsurer will accept automatically without further negotiations any cession falling within the terms of the agreement. Negotiation would be necessary only at the renewal of the treaty. The scope of the treaty among other issues normally stipulate the type of risk, the value involved, and the period of the treaty.
Ceding company: These are the people behind the contract issuing process. However, they are the insurance company that passes a part or all of its risks from its insurance policy portfolio to a reinsurance firm
Reinsurer: This is the purchasing company, which assumes the risks specified in the contract for a premium
This video below will help you get more insight into what reinsurance of a treaty is all about. please watch now
Reinsurance of treaty is the form of reinsurance in which the ceding company agrees to cede a particular type of business to the reinsurer.
The reinsurer, on the other hand, agrees to accept all business qualifying under the agreement, known as the “treaty.” In a reinsurance treaty, the ceding company is assured that all of its risks falling within the terms of the treaty will be reinsured in accordance with treaty terms which can be monetary, geographical, branch, and section.
It is a binding formal agreement, contract, or other written instrument that establishes obligations between the reinsurer “who agrees to accept a risk of a particular group of policies within an agreed time frame” and the ceding company where the ceding company accepts to cede and reinsurer agrees to accept as well in relation to the treaty terms.
Types of Reinsurance of Treaty
Reinsurance of the treaty is grouped into two. The proportional and Non-proportional treaties.
Proportional Reinsurance Treaty: When talking about the proportional treaty, there exists an agreed proportions between the reinsure and the ceding company with respect to the insurance cover accepted by the existing ceding company.
The accumulated amount and the amount ceded represent the proportions of the cover accepted by the direct insurer. The premium received by the ceding company will be shared in the same proportions. During claim settlement, the same proportion is also used. However, other forms of proportional treaty reinsurance are
i. Quota share Treaty: In other words, a quota share treaty can also be regarded as a “Fixed share treaty”. There exist a binding formal reinsurance agreement that points out that the ceding office must cede and the reinsurance must also welcome or accept a particular proportion of every risk written by the ceding company on an agreed class of insurance business.
The reinsurance receives the same fixed percentage of the premium received on every risk underwritten by the ceding company. In event of claims, the reinsurer must also refund that same proportion of all claims.
In other words, a quota share treaty provides for a fixed proportion of all risk of a given class of insurance as a whole to be ceded to the reinsurer, together with the same proportion of the premium.
Take, for instance, a ceding company that may decide to arrange an 80% Quota share treaty covering all its fire business. The retention capacity of the company will be 20% of each and every risk and the proportion to be ceded to the reinsurer is 80%. Thus the reinsurer will cover 80% of all the risks, will receive 80% of all the premiums, and pay 80% of all claims falling under the treaty.
2. Surplus Share Treaty: A surplus share treaty is an automatic reinsurance contract whereby the reinsurer must accept any contract risk over the retention of the ceding office. A surplus treaty allows the ceding company to reinsure under the treaty any part of the risk that is the surplus that it is not retaining for its own account.
However, if a certain risk is wholly retained, there are zero surpluses left to place in the treaty and they are usually arranged in lines.
3. Facultative/obligatory reinsurance of treaty: This is the form of proportional treaty reinsurance whereby the reinsurer is under an obligation to accept all risks, usually a share of certain risks defined in the agreement which are underwritten by the ceding company.
It is not an obligation for the ceding office to cede risks to the treaty. This is often used in this modern time.
Non- Proportional treaty
Non-proportional treaty reinsurance covers the form of cover whereby the ceding company and reinsurer do not share each loss in any fixed proportion and may not share some losses at all. The following can be found under non-proportional reinsurance.
i. Loss Excess Ratio treaty: This is also known as the stop-loss treaty. It prevents the ceding company from losing more than a specified amount of loss for a given class of insurance business say fire risks.
Instead of dealing with individual risk or individual events, the treaty is designed to prevent wide fluctuations of the net claims ratio of a particular class of insurance over one financial year compared with another financial year.
In other words, the reinsurer is not called upon to pay for any losses until the loss ratio for the year exceeds an agreed percentage of the premiums. The reinsurer is liable for all losses if the loss ratio exceeds the agreed percentage until the limit of liability under the treaty is reached.
ii. Excess of loss treaty: This is the form of reinsurance contract whereby the reinsurer accepts to reimburse the ceding office for all losses in excess of a relatively high limit fixed by the contracting parties and known as the ceding company net limit and in consideration of which the reinsurer will receive a percentage of the ceding company’s net premium income for the class of business reinsured under the excess of loss treaty. Also, it is useful for liability insurance or where a very large loss may be sustained say the catastrophic risk in oil risks.
Merit Quota share to the ceding company
1. Simplicity: The quota share is extremely very easy to handle which means a very low cost of administration.
2. Premium settlement: The balance due to the reinsurer is settled after the period of the account has been closed, when the ceding company has already collected the original premium. This means a favorable cash flow position for the ceding company.
3. The quota share reinsurer makes a considerable contribution to the financing of the acquisition of the new business (by paying reinsurance commission and taking his share of the unearned premium reserve).
Demerit of Quota share to the ceding company
1. The underwriting capacity will be rather limited so the ceding company will frequently have to resort to additional sessions.
2. The ceding company cannot vary its retention for any particular risk and thus it pays away premiums on small risks which should well be retained for the ceding company sown account without undue burden on the insurance fund.
Treaty reinsurance is a kind of reinsurance operation that is done based on the contract for a limited or unlimited period between the policyholder insurer and reinsurance insurer.
In these contract obligations, each party is determined completely accurately. However, there are different kinds of treaty agreements. The most common is called proportional treaties, in which a percentage of the ceding insurer’s original policies is reinsured, up to a limit. Any policies written in excess of the limit are not to be covered by the reinsurance treaty.