Treaty reinsurance

Here is a clear, practical, “no-nonsense” explanation of the main treaty reinsurance types, with easy examples and quick comparisons so the ideas stick.

TREATY REINSURANCE — SIMPLE EXPLANATION

A treaty is a long-term reinsurance agreement where the reinsurer automatically accepts a defined block of business (e.g., all fire policies) from the insurer.

A. QUOTA SHARE TREATYDefinition (straightforward):

The insurer and reinsurer share every policy in fixed percentages.

How it works:

• The primary insurer keeps a fixed percentage (say 30%)

• The reinsurer takes the remaining percentage (70%)

• The sharing applies to sum insured, premium, and losses

Example (easy math):

Sum insured = ETB 10,000,000
Quota share: 30% insurer : 70% reinsurer

• Insurer retains = 30% × 10,000,000 = ETB 3,000,000

• Reinsurer takes = 70% × 10,000,000 = ETB 7,000,000

If a loss of ETB 5,000,000 occurs, they also share:

• Insurer pays 30% = ETB 1,500,000

• Reinsurer pays 70% = ETB 3,500,000

When insurers use quota share:

• For new companies with weak capital

• To stabilize results

• When the insurer wants strong support from reinsurers

B. SURPLUS SHARE TREATYDefinition (easy):

The insurer keeps a fixed “line” (maximum amount per risk), and the reinsurer takes the surplus above that.

Not a fixed percentage—percentage changes depending on policy size.

How it works:

• Insurer decides retention: e.g., ETB 2,000,000

• Surplus (extra above retention) goes to the reinsurer

• Reinsurer’s share varies by the policy size

Example:

Retention (insurer): ETB 2,000,000
Surplus capacity: up to 4 lines (meaning 4 × 2,000,000 = ETB 8,000,000)

Policy 1: ETB 3,000,000

• Insurer keeps 2,000,000

• Reinsurer takes 1,000,000 (1 line)

Policy 2: ETB 10,000,000

• Insurer keeps 2,000,000

• Reinsurer takes 8,000,000 (4 lines)

Percentage changes:

• For small risks: insurer keeps more

• For big risks: reinsurer takes more

Why insurers use surplus treaties:

• To protect against very large risks

• To keep more of smaller, profitable risks

• To avoid giving away too much business

C. EXCESS OF LOSS TREATY (NON-PROPORTIONAL)Definition (straight to the point):

The reinsurer pays only the part of a loss above the insurer’s retention (deductible), up to a limit.

It does NOT share premiums and risks proportionally.

How it works:

Retention = the insurer’s deductible
Reinsurer covers losses beyond that point.

Example:

Retention = ETB 1,000,000
Cover limit = ETB 4,000,000

Loss = ETB 3,000,000

• Insurer pays first ETB 1,000,000

• Reinsurer pays next ETB 2,000,000

• Remaining limit unused

If loss = ETB 7,000,000

• Insurer: 1,000,000

• Reinsurer: 4,000,000

• Remaining 2,000,000 is uninsured (insurer pays or another layer applies)

Why insurers like excess of loss:

• Protects against severity (big losses)

• Stabilizes financial results

• Common in catastrophe covers (earthquake, flood)

D. REINSURANCE POOLDefinition:

A pool is a group of insurers or reinsurers who combine resources to share very large or special risks.

It spreads the risk across many participants.

How it works:

Each member contributes capital or capacity.
When a risk is written:

• The pool accepts it

• Losses and profits are shared based on agreed percentages

Common examples:

• Aviation insurance pool

• Oil & gas risk pool

• Agricultural risk pools

• East African reinsurance pools

Real-life analogy:

It’s like taxi owners forming a union: everyone contributes, everyone shares big expenses when a car breaks down.

QUICK COMPARISON TABLE (VERY USEFUL FOR EXAMS)

If you want, I can also prepare exam-style questions with answers for these treaty types.