Treaty and Facultative
Treaty reinsurance policies are agreements that cover broad groups of policies, such as an insurance company’s auto business. These agreements cover all policies that fall within the terms of the contract automatically unless either company cancels the policy.
Facultative reinsurance policies cover specific individual, high-value, or hazardous risks, like a hospital. In contrast to treaty agreements, the reinsurer has the power (or faculty) to accept or reject all or a part of any agreement with the insurance company.
Reinsuring a hospital, for example, requires the company to consider a variety of factors, including all aspects of the hospital’s operation and safety records, as well as the attitude and management of the primary insurer seeking coverage.
Proportional and Nonproportional
Treaty and facultative policies can be proportional or nonproportional in structure.
A proportional (also known as pro rata) agreement obligates the reinsurer to cover a portion of the losses for which it receives a prorated share of the insurer’s premiums. For a claim, the reinsurer bears a portion of the losses based on a prenegotiated percentage.1 The reinsurer also reimburses the insurer for processing, business acquisition, and writing costs. Proportional agreements are most commonly applied to property coverages.
Nonproportional, or “excess of loss,” agreements kick in when the insurer’s losses exceed a set amount per policy or per year.2 Most often, nonproportional reinsurance agreements cover individual policies or events that may affect multiple policyholders.