Reinsurance Treaty Review Guide
A reinsurance treaty is an insurance contract about insurance contracts — recursion built into the document, and into the disputes. Eight provisions determine whether the cedent gets paid when claims hit, and how much.
What it is
A reinsurance treaty is a contract by which one insurer (the cedent) transfers some portion of its insurance risk to another insurer (the reinsurer) in exchange for a portion of premium. The treaty governs an entire class of business written by the cedent (e.g., all property cat exposure in California for the year) rather than a single insured risk.
The two main structural forms: proportional (quota share, where the reinsurer takes a fixed percentage of every risk) and non-proportional (excess of loss, where the reinsurer pays only above a defined retention layer).
Reinsurance treaties draw heavily on industry custom and "market practice." Many provisions are short or boilerplate; the substance lives in defined terms ("Ultimate Net Loss," "Loss Occurrence," "Sunset") that can have very different meanings across treaties.
Common clauses to check
- [ 01 ]
Type & structure
Quota share, surplus, excess of loss, stop-loss, or aggregate. Each behaves differently.
What to look for- Treaty type clearly stated.
- For proportional: quota share percentage and limits.
- For excess of loss: retention (deductible), limit, and number of reinstatements.
- Layer structure if multiple layers.
Red flags- Hybrid structures combining proportional and excess that introduce gaps.
- Reinstatements limited to one without prepaid premium.
- Co-participation requirements that effectively reduce coverage.
- [ 02 ]
Subject business
What insurance written by the cedent is reinsured. The scope of the treaty.
What to look for- Specific lines of business covered.
- Geographic scope.
- Underwriting period (when the cedent's policies must be issued or in force).
- Excluded business (catastrophe-prone, certain industries, war).
Red flags- Vague scope language giving reinsurer outs on unusual losses.
- Implicit exclusions through narrow definitions.
- Multiple treaty exclusions stacking to create gaps in coverage.
- [ 03 ]
Ultimate Net Loss (UNL)
The amount on which reinsurance attaches. Defines what counts as a loss for treaty purposes.
What to look for- UNL definition — gross loss net of subrogation, salvage, other reinsurance recoveries.
- Treatment of allocated loss adjustment expenses (ALAE) — included or separate.
- Currency — USD vs. local currency conversion mechanics.
- Aggregation rules across multiple losses from same event.
Red flags- UNL net of inuring reinsurance not yet collected — creates timing mismatches.
- ALAE excluded entirely — significant gap.
- UNL definition that doesn't aggregate related losses (e.g., serial pollution claims).
- [ 04 ]
Premium & commission
What the reinsurer gets paid and what the cedent gets back. Different mechanics for proportional vs. excess of loss.
What to look for- Premium calculation method (percentage of subject premium, rate per unit of exposure).
- Ceding commission — for proportional treaties, percentage of premium that the cedent retains.
- Profit commission — additional commission tied to favorable loss experience.
- Sliding scale commission tied to loss ratio.
- Adjustment provisions and reporting timelines.
Red flags- Premium adjustments based on data the reinsurer can audit but cedent can't easily reconstruct.
- Profit commission with subjective triggers.
- Reporting requirements that exceed cedent's normal data infrastructure.
- [ 05 ]
Follow-the-fortunes / follow-the-settlements
Reinsurer agrees to follow the cedent's underwriting and claims decisions. The doctrine of recursion that makes reinsurance work.
What to look for- Express "follow the settlements" clause.
- Standard for cedent's decisions — good faith, businesslike.
- Carve-outs (gross negligence, willful misconduct, fraud).
- Right of reinsurer to participate in major claims.
Red flags- Carve-outs that effectively allow reinsurer to second-guess every claim decision.
- Imposing fiduciary standards on cedent's claim decisions.
- Reinsurer's right to "review and approve" individual claim payments.
- [ 06 ]
Claims cooperation & control
Who handles claims and on what terms. Particularly important on excess of loss treaties where reinsurer's economic interest is high.
What to look for- Cedent's primary control over claims investigation and settlement.
- Notification requirements for large claims.
- Reinsurer's right to associate (participate at its own expense).
- Cooperation duties on both sides.
Red flags- Reinsurer's right to take over claim handling.
- Notification thresholds set so low they capture most claims.
- Failure to cooperate as a basis for coverage denial.
- [ 07 ]
Sunset / extinguishment
When reinsurance obligations end. Especially important for long-tail liability lines.
What to look for- Whether the treaty has a sunset clause (extinguishment after X years).
- Run-off arrangements for IBNR (incurred-but-not-reported) claims.
- Commutation provisions — accelerated settlement of reinsurance obligations.
Red flags- Aggressive sunset terms cutting off legitimate IBNR claims.
- Discretionary commutation rights favoring reinsurer.
- Run-off provisions that don't protect cedent's long-tail exposure.
- [ 08 ]
Insolvency & offset
How reinsurance behaves if either party becomes insolvent. Critical for credit risk on the reinsurance recoverable.
What to look for- Cut-through endorsements (allowing direct payment to original insureds).
- Offset rights against reinsurance recoverables.
- Mandatory deposits or letters of credit.
- Treatment under Insurance Code/state insolvency laws.
Red flags- No cut-through, leaving cedent with credit exposure to reinsurer.
- Offset rights only available to the reinsurer.
- Inadequate deposits given known credit profile.
Other watchouts
- Reporting frequency and format (bordereaux, statements).
- Audit and inspection rights.
- Currency clauses on multi-jurisdictional risks.
- Tax provisions — federal excise taxes on premium.
- Choice of law and arbitration provisions.
- Special acceptances — risks that fall outside subject business but are accepted.
- Errors and omissions clauses.
- Service of suit clauses.
- Sanctions and OFAC compliance.
- Late payment provisions and interest.
Frequently asked questions
- What's the difference between proportional and excess of loss reinsurance?
- Proportional reinsurance (quota share, surplus): the reinsurer takes a fixed percentage of every risk and the corresponding share of premium. Excess of loss: the reinsurer pays only when losses exceed a retention layer; below that, the cedent is on its own. Proportional protects against frequency and severity equally; excess of loss focuses on severe events.
- What is follow-the-settlements?
- A doctrine (often expressly stated in the treaty) by which the reinsurer agrees to follow the cedent's settlement decisions in good faith. Without it, the reinsurer could second-guess every claim payment, making reinsurance impractical. Subject to carve-outs for gross negligence, willful misconduct, or settlements outside the treaty's scope.
- What's a sunset clause?
- A provision that ends the reinsurer's liability for claims reported after a stated period (e.g., 5 years after the end of the treaty period). Important for long-tail lines where claims may be reported decades after the policy was written. Cedents resist; reinsurers prefer.
- What is Ultimate Net Loss (UNL)?
- The amount on which reinsurance attaches — typically gross loss minus subrogation recoveries, salvage, and other reinsurance recoveries. Sometimes includes ALAE; sometimes excludes. Critical because the definition determines how much the reinsurer pays. Defined differently across treaties; review the specific definition in each.
- What's a cut-through endorsement?
- A provision allowing the original insured (the policyholder of the cedent's underlying policy) to claim directly against the reinsurer if the cedent becomes insolvent. Provides credit protection to the original insured. Standard in some markets, controversial in others. Highly relevant in distressed cedent scenarios.
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