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Understanding Treaty Reinsurance: A Guide for South African Insurers

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8 May 2024

Reinsurance acts as a backbone in the complex insurance landscape, providing stability and support to insurance companies. One of the foundational elements of this sector is treaty reinsurance. For insurance professionals and stakeholders in South Africa, grasping the intricacies of treaty reinsurance is essential for effective risk management and financial planning. In this article we unpack what treaty reinsurance entails and its pivotal role within the industry.

What is Treaty Reinsurance?

Treaty reinsurance is a form of reinsurance where the reinsurer agrees to accept specific portions of risk from a ceding company’s entire portfolio, rather than individual risks. This arrangement is typically structured under a contract that encompasses a defined category of policies, which means that the reinsurer must cover all policies included in that category. The terms are agreed upon in advance, setting a framework that governs the transfer of risk for a specified period, usually spanning multiple years.

Why is Treaty Reinsurance Important?

Treaty reinsurance serves several critical functions in the insurance ecosystem:

1. Risk Transfer: It allows primary insurers to transfer a block of risks, helping them manage the potential volatility associated with their portfolios. This transfer helps maintain solvency and provides a safety net against large-scale claims.

2. Capital Management: By ceding risk to reinsurers, insurance companies can free up capital, improving their capacity to underwrite more policies and expand their market share without compromising on financial stability.

3. Stabilisation: It helps stabilise the insurance market by distributing risk across more entities, thereby mitigating the impact of significant or catastrophic events on a single company.

4. Expertise and Support: Reinsurers often possess specialised knowledge and skills in handling complex and large-scale risks. Primary insurers benefit from this expertise, which can help in accurately assessing and pricing their insurance offerings.

Types of Treaty Reinsurance

Treaty reinsurance can be broadly classified into two categories:

1. Proportional Treaty Reinsurance: In this arrangement, the reinsurer agrees to accept a specified percentage of each policy within the portfolio. They share premiums and losses with the ceding company based on this proportion. This type of treaty often includes a ceding commission to the primary insurer to cover administrative costs and acquisition expenses.

2. Non-proportional Treaty Reinsurance (Excess of Loss): This form is designed to provide coverage when losses exceed a predetermined threshold. It is particularly useful for protection against catastrophic events. Here, the reinsurer’s liability is limited to losses that exceed the retention limit up to the maximum coverage cap. Premiums for non-proportional treaties are not proportional to the premiums of the underlying policies but are instead based on the reinsurer’s potential exposure.

Considerations for Choosing Treaty Reinsurance

When deciding on treaty reinsurance, insurers should consider several factors:

Risk Appetite and Profile: Understanding the company’s risk profile and appetite is crucial. This helps in selecting the right type of treaty reinsurance that aligns with the company’s strategic objectives and risk management policies.

Reinsurer’s Financial Strength: The stability and financial health of the reinsurer are paramount. An insurer needs to ensure that the reinsurer can meet its obligations, especially in scenarios of large-scale claims.

Market Conditions: Economic and market trends can influence reinsurance decisions. Factors such as regulatory changes, market saturation, and economic cycles should be considered.

Cost vs Benefit Analysis: The cost of reinsurance premiums should be weighed against the benefits of risk transfer and capital relief it provides. This analysis will help determine the economic viability of the treaty arrangements.

Treaty Reinsurance With Oak Tree Intermediaries

With a deep understanding of the insurance market and access to a vast network of top-rated reinsurers, we have the capabilities to provide our clients with optimal treaty structures that deliver both risk protection and improved capital efficiency. Whether it’s Property & Casualty, Life & Health, or Specialty lines of business, our Treaty Reinsurance service is designed to empower insurers to thrive in today’s ever-changing and challenging risk landscape. Partner with us to harness the power of reinsurance and bolster your competitive advantage in the marketplace.