when insurance companies underwrite a new policy they agree to take on additional risk in exchange for a premium the more policies an insurer underwrites the more risk it assumes one way an insurer can reduce its exposure is to cede some of the risk to a reinsurance company in exchange for a fee reinsurance allows the insurer to free up risk capacity and to protect itself from high severity claims 
even though the reinsurer may not immediately underwrite each individual policy it still agrees to cover all the risks in a treaty reinsurance contract by signing a treaty reinsurance contract the reinsurer and the ceding insurance company indicate the business relationship will likely be long term the long term nature of the agreement allows the reinsurer to plan out how to achieve a profit because it knows the type of risk it is taking on and it is familiar with the ceding company treaty reinsurance contracts can be both proportional and non proportional with proportional contracts the reinsurer agrees to take on a specific percentage share of policies for which it will receive that proportion of premiums if a claim is filed it will pay the stated percentage as well with a non proportional contract however the reinsurance company agrees to pay out claims if they exceed a specified amount during a certain period of time advantages of treaty reinsuranceby covering itself against a class of predetermined risks treaty reinsurance gives the ceding insurer more security for its equity and more stability when unusual or major events occur reinsurance also allows an insurer to underwrite policies that cover a larger volume of risks without excessively raising the costs of covering its solvency margins in fact reinsurance makes substantial liquid assets available for insurers in case of exceptional losses treaty vs facultative vs excess of loss reinsurancetreaty reinsurance differs from facultative reinsurance treaty reinsurance involves a single contract covering a type of risk and does not require the reinsurance company to provide a facultative certificate each time a risk is transferred from the insurer to the reinsurer facultative risk on the other hand allows the reinsurer to accept or reject individual risks moreover it is a type of reinsurance for a single or a specific package of risks that means both the reinsurer and the cedent agree on what risks will be covered in the agreement these agreements are generally negotiated separately for each policy the expenses involved in underwriting facultative contracts are thus much more expensive than a treaty reinsurance agreement treaty reinsurance is less transactional and less likely to involve risks that would have otherwise been rejected from reinsurance treaties excess of loss reinsurance is a non proportional form of reinsurance in an excess of loss contract the reinsurer agrees to pay the total amount of losses or a certain percentage of losses above a certain limit to the cedent excess of loss reinsurance is less similar to standard insurance like treaty and facultative reinsurance are oftentimes requiring both the cedent and reinsurer to share in the losses 