treaty

Reinsurance is a practice where one insurance company transfers all or part of a risk it has assumed to another insurer. This is done through contracts called treaties, which outline how premiums and losses are shared between the participating insurers.12

There are two primary types of treaties:
* Pro rata treaties: Premiums and losses are divided according to stated percentages.1
* Excess-of-loss treaties: The originating insurer covers losses up to a certain amount, with reinsurers covering losses above that threshold.1

Reinsurance allows an insurer to accept larger risks, stabilizes profits, and reduces the capital needed to underwrite business.1