Types of reinsurance
Reinsurance is generally described along two dimensions: how risks are arranged (treaty versus facultative) and how losses are shared (proportional versus non-proportional).
Treaty and facultative describe how coverage is arranged. Treaty reinsurance covers a whole class or portfolio of policies under a single ongoing agreement, so qualifying risks are automatically included without individual review. Facultative reinsurance is arranged one risk at a time, with the reinsurer deciding whether to accept each individual exposure, and it is often used for unusual, very large, or hard-to-place risks.
Proportional and non-proportional describe how premiums and losses are split. Under proportional reinsurance (also called pro rata), the ceding insurer and the reinsurer share premiums and losses in an agreed proportion, as in quota share and surplus share treaties. Under non-proportional reinsurance, such as excess of loss, the reinsurer pays only when losses rise above an agreed retention, absorbing the larger or more severe claims.
These categories combine in practice, so a program might be a proportional treaty or a non-proportional facultative placement. The right structure depends on what the insurer is trying to achieve, whether that is broad capital relief, protection against a single catastrophic event, or coverage for a one-off exposure.
Capacity providers such as RiskCube Re may use these structures to support MGAs and carriers writing emerging and complex risks.
Related Terms
Definitions are educational and general, and specific contracts, endorsements, and state rules may modify them. For regulatory guidance, refer to the NAIC or the Insurance Information Institute.