In short
Treaty reinsurance is a standing agreement, usually renewed yearly, under which a reinsurer automatically accepts an agreed share of a whole class of an insurer's policies on pre-set terms.
Also called: reinsurance treaty, obligatory treaty, quota share treaty, surplus treaty, excess of loss treaty
What is treaty reinsurance?
Treaty reinsurance is reinsurance arranged for a whole portfolio rather than for one risk at a time. The insurer (cedant) and the reinsurer agree in advance which classes of business are covered, how risks and premiums are shared, and the limits and exclusions. Every policy that falls within the treaty is then reinsured automatically: the cedant must cede it and the reinsurer must accept it, without separate negotiation.
IRDAI's reinsurance regulations define a treaty as a reinsurance contract, "usually for one year", that sets out the technical and financial terms for defined classes or segments of business. In India, most general insurance treaties start on 1 April, at the beginning of the financial year.
Types of treaty
| Type | How losses are shared | Typical use |
|---|---|---|
| Quota share | The reinsurer takes a fixed percentage of every policy's premium and every loss | New or fast-growing portfolios, capital relief, health and motor |
| Surplus | The cedant keeps a fixed amount (one "line") per risk; the reinsurer takes the excess up to a set number of lines | Fire, engineering and other property where sums insured vary widely |
| Per risk excess of loss | The reinsurer pays the part of any single risk loss above a set retention, up to a limit | Protecting the cedant's net retention on large individual risks |
| Catastrophe excess of loss | The reinsurer pays the part of the total loss from one event (cyclone, flood, earthquake) above a retention | Accumulation from natural catastrophes |
| Stop loss / aggregate | The reinsurer pays when the year's total losses exceed a set loss ratio | Crop and other volatile portfolios |
In proportional treaties (quota share and surplus), the reinsurer usually pays the cedant a reinsurance commission to cover acquisition and administration costs. In non-proportional treaties, the reinsurer charges a separate premium and the cover is often reinstated after a loss for an additional premium.
How treaty reinsurance works in India
- Board-approved programme. Under the IRDAI (Re-insurance) Regulations, 2018, each insurer's board approves a reinsurance programme and segment-wise retention policy. The insurer files a summary at least 45 days before the financial year and the final programme within 45 days after it begins, showing treaty capacity, retention limits, commission structure, event limits and reinstatement terms for each segment.
- Order of preference. When seeking treaty terms and placing shares, cedants must approach Indian reinsurers first, then foreign reinsurance branches and qualifying IFSC insurance offices, and then cross-border reinsurers, subject to rating and cession limits.
- Underwriting capacity. The IRDAI (Insurance Products) Regulations, 2024 define an insurer's underwriting capacity as the largest single risk it can take "with the support of Treaty Reinsurance protection". A risk bigger than that is a large risk, needs Risk Management Committee approval, and usually requires facultative reinsurance.
- Obligatory cession. The 4% statutory cession to GIC Re for 2026-27 works like a compulsory quota share on every general insurance policy, with minimum commission rates set by IRDAI.
Example of a surplus treaty
A fire insurer keeps ₹10 crore on any one risk (one line) and has a 9-line surplus treaty, giving automatic capacity of ₹100 crore per risk. It writes a factory with a sum insured of ₹60 crore. It keeps ₹10 crore (one-sixth) and cedes ₹50 crore (five-sixths). A ₹12 crore fire loss is shared the same way: ₹2 crore net to the insurer and ₹10 crore from the treaty reinsurers. A ₹150 crore risk would exceed the treaty, so the extra ₹50 crore needs facultative placement. The figures are illustrative.
What treaty reinsurance means for distribution
- Speed of quotes. Risks that fall within treaty limits and terms can be quoted and issued quickly because no reinsurer has to approve each one. Brokers and agents get faster turnaround when they bring business that fits the insurer's treaties.
- Exclusions shape appetite. Treaties carry exclusions, for example for certain hazardous occupancies or for perils the reinsurer will only cover separately. When an underwriter declines a risk that seems ordinary, a treaty exclusion is often the reason.
- Renewal season. Treaty renewals around 1 April can change pricing and how much risk an insurer is willing to keep. Commercial distribution teams should expect revised terms and occasional delays on large accounts in March and April.
- Health and motor pricing. Quota share treaties on retail health and motor share both premium and claims. When reinsurers see poor results, commissions on these treaties fall or capacity shrinks, and insurers respond with price increases or tighter underwriting at the front line.
- Life insurance. Term insurance underwriting rules and non-medical limits are often agreed with treaty reinsurers, so changes in treaty terms can show up quickly in what advisers can sell without medicals.
Sources
Cite this entry
Glotus456 Research. "Treaty reinsurance." Insurance Encyclopedia (India), updated 17 October 2026. https://www.glotus456.com/research/encyclopedia/treaty-reinsurance
About this entry. Written by the Glotus456 Research team, a BFSI distribution consultancy in Gurugram working with insurers, NBFCs and FinTechs across India. It explains how things work and is general information, not legal, tax or financial advice. Rules change: check the current IRDAI regulation or circular, or the official scheme or tax source, before acting.