This is a standing arrangement where the ceding insurer has an obligation to cede all risks that fall within the purview of the arrangement and the reinsurer is under an obligation to accept all that is ceded. Thus, Treaty reinsurance consists of an agreement between the original insurer and reinsurer whereby the reinsurer automatically accepts a certain liability for all risks falling within the scope of the agreement. Treaty reinsurance may be transacted either on proportional basis or non-proportional basis.
A formal treaty wording is usually drawn up by the parties to describe:
1. the monetary limits and mode of operation
2. the classes of business covered, the territorial scope, the risks excluded
3. the calculation and payment of premiums, the calculation and payment of claims and the period of agreement
4. the commissions, including profit commissions, payable to the insurer
5. the rendering of reinsurance accounts to the reinsurer and settlements thereof
Since treaty reinsurance provides automatic cover, usually for a year, the insurer is guaranteed a definite amount of reinsurance protection on every risk which he accepts. The administrative costs are therefore much lower than those applying to facultative reinsurance.

In this type of reinsurance, the insurer and reinsurer share the risk, the premium as well as the losses in an agreed proportion. The premium and claims are divided in the same proportion as the risk is. Thus if the reinsurer shares 60% of the risk, he is paid 60% of the original premium and he also shares 60% of all losses pertaining to the risk. However, the insurer who shares this business is compensated for his acquisition costs by way of an agreed commission which is his income. Quota share treaties, the obligatory cessions, surplus treaties, the market surplus treaty, the pool arrangements, the intercompany cessions and the Auto fac arrangements all fall within this definition

We aUnder this type of reinsurance arrangements, the risks, premiums and losses are not shared on a proportional basis. Rather, this type of reinsurance seeks to protect the losses of the insurer by the reinsurer on an agreed basis. In other words, the reinsurer agrees to pay losses sustained by the insurer above an agreed amount or percentage called a deductible. Such losses may be in relation to a particular risk or many risks in a particular class of risk or even all risks of the insurer by the reinsurer. Of course, such reinsurance comes at a cost for which the reinsurer is paid a reinsurance premium on some agreed basis. Risk Excess of Loss, Catastrophe Excess of Loss, Stop Loss, Aggregate Excess of Loss, Umbrella Excess of Loss etc. fall within this type of reinsurance.

This is an arrangement where the ceding insurer (reinsured) can choose which risks he wants to cede to the arrangement but the reinsurer has no option to choose – he agrees to accept all that is ceded.
This form of reinsurance is therefore a combination of facultative and treaty forms. At present this type of treaty is not common though one would come across such arrangement in life reassurance. It can be placed during weak reinsurance market conditions or for getting additional capacity but cannot be relied upon as a primary reinsurance.