Types of Re-insurance contracts

Broadly speaking, there are two types of reinsurance contracts:

1. Facultative Reinsurance: It is that type of reinsurance whereby the contract relates to one particular risk and is expressed in a reinsurance policy Each transaction under Facultative Reinsurance has to be negotiated individually and each party to the transaction has a free choice. i.e. for the ceding company to offer and the reinsurer to accept. The main drawback of this type of insurance is the volume of work involved and time taken to cover the risk.

2. Treaty Insurance: Under this type of insurance a Treaty agreement is entered into between ceding company and the reinsurer(s) whereby the reinsurances are within the limits of the Treaty. These limits can be monetary, geographical, the section of business etc... Under this contract, it is obligatory for the re-insurer to accept all risks within the scope of this Treaty and it is obligatory for the ceding company to cede risks in accordance with the terms of the Treaty.