CAS Practice Exam 2026 – Complete Study Guide

Treaty reinsurance is a form of reinsurance in which the reinsurer agrees to cover a defined category or class of risks, typically for a set period of time, without the need for the primary insurer to negotiate terms for each individual risk. This means that once a treaty is in place, the reinsurer is obligated to accept all risks that fall within the defined parameters of the treaty.

This arrangement streamlines the reinsurance process, allowing insurers to transfer risk more efficiently, as their underlying policies are automatically covered without needing separate negotiations for each individual risk. Thus, the primary insurer can better manage its capacity and underwriting processes, as the reinsurer's acceptance is properly defined in advance for a particular segment of their portfolio.

In contrast, facultative reinsurance involves the reinsurer reviewing and deciding whether to accept or reject specific individual risks presented by the ceding insurer, allowing for more selective risk management but also requiring more effort for each individual occurrence.

Therefore, the understanding that treaty reinsurance obligates the reinsurer to cover all risks within a specified class is a fundamental distinction distinguishing it clearly from facultative reinsurance.