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Chapter 2 Different types of reinsurance 2/5

• The insurer may need to disclose full information regarding its underwriting of the risk. This could be a
problem if the reinsurer is also seen as a competitor in that field. However, in practice, facultative
reinsurance is often undertaken by the reinsurer based on a minimum disclosure of information if a
suitable level of trust exists between the contracting parties to the reinsurance arrangement. Chapter
• There is the possibility of the reinsurer exercising a certain amount of influence over the insurer’s
underwriting by asking them to improve the risk offered or influencing unduly their assessment of the 2
premium on the original risk.
• The insurer may lose control over the handling of the risk. For example, it may not be allowed to agree Refer to chapter 7
for clauses
policy amendments without the prior agreement of the reinsurer. Reinsurers may control the handling
of any claims by the use of a ‘claims cooperation’ or ‘claims control clause’.

A2 Treaty reinsurance

Consider this…
From what you have read about treaty reinsurance so far, what do you think its main advantage could be?

Instead of having to place all the risks individually with the reinsurer and having the possibility that each
separate one could be accepted or rejected, a solution has been developed whereby the insurer is
obliged to cede a fixed amount of its business and the reinsurer is obliged to accept, all within the terms
and limitations of the treaty wording which is agreed in advance.

Consider this…
A treaty is a formal agreement between two parties for the provision of automatic reinsurance coverage. Can you
think of a reason why a treaty has to be arranged in advance?

A2A Uses of treaty reinsurance

The treaty is the contract that outlines the terms and shares of risk that are to be placed with a reinsurer.
Treaty outlines the
For example, a motor insurer insures 100,000 drivers each with his or her own vehicle; if it were to terms and shares
reinsure all of these on a facultative basis that would mean producing 100,000 reinsurance contracts, of risk Reference copy for CII Face to Face Training
each of which would have to be agreed with the reinsurer. Instead, just one reinsurance treaty is
organised. By agreeing to this contract, the insurer knows that it has a reinsurer which is automatically
on cover.

Details on the exact workings of treaties are dealt with in chapter 4 and chapter 5.
A2B Advantages of treaty reinsurance

• The reinsured has automatic reinsurance cover and so problems associated with the individual
consideration of risks on a facultative basis do not apply.
• The reinsured receives a contribution towards costs for proportional treaties in the form of ceding
commission.
• The reinsured can receive an additional contribution if the business is profitable for proportional
treaties in the form of profit commission.
• Administration is quicker and easier than for facultative reinsurance.
• Accounting procedures can be simplified by the use of quarterly accounting.
• As treaties generally deal with a large number of homogeneous risks, computer technology can be
used for data storage and analytical techniques.

A2C Disadvantages of treaty reinsurance
There is no freedom of choice since both parties are tied into the contract. Therefore, there has to be a
degree of trust in the underwriting ability of the original insurer, since the treaty cannot be cancelled
prior to the end of the period unless a specific cancellation provision is agreed.

Example 2.1
Insurer Y wishes to reinsure part of its line on an aerosol manufacturer’s factory to reinsurer Z under its treaty but Z
has excluded such risks from the treaty. Options available to Y are to reduce its gross acceptance of the original risk
to a net line without reinsurance, to buy facultative cover or to see if Z is prepared to cover the risk under the treaty
as a special acceptance.