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💰 '''Treaty pricing''' is the process by which [[Definition:Reinsurance | reinsurers]] determine the [[Definition:Premium | premium]] or economic terms for a [[Definition:Reinsurance treaty | reinsurance treaty]] — a standing agreement under which a [[Definition:Cedent | ceding company]] transfers a defined class or portfolio of [[Definition:Risk | risks]] to one or more reinsurers over a specified period. Unlike [[Definition:Facultative reinsurance | facultative reinsurance]], where each risk is individually evaluated and priced, treaty pricing must account for the aggregate characteristics of an entire book of business, making it a blend of actuarial science, market dynamics, and relationship-driven negotiation. The pricing outcome directly shapes the [[Definition:Cedent | cedent's]] [[Definition:Net retention | net retention]], [[Definition:Ceding commission | ceding commissions]], and ultimately its [[Definition:Profitability | profitability]].

📊 Reinsurers build treaty prices using a combination of [[Definition:Experience rating | experience rating]] — analyzing the cedent's historical [[Definition:Loss ratio (L/R) | loss ratios]], [[Definition:Loss development | development patterns]], and [[Definition:Large loss | large loss]] activity — and [[Definition:Exposure rating | exposure rating]], which models expected losses based on the portfolio's composition independent of past results. For [[Definition:Catastrophe reinsurance | catastrophe treaties]], [[Definition:Catastrophe model | catastrophe models]] from vendors like RMS, AIR, and Verisk play a central role, generating [[Definition:Probable maximum loss (PML) | probable maximum loss]] estimates and [[Definition:Exceedance probability | exceedance probability]] curves that anchor the pricing discussion. Negotiations typically occur through [[Definition:Reinsurance broker | reinsurance brokers]] who prepare detailed submissions and manage the placement across a panel of reinsurers, each of whom may quote slightly different terms based on their own [[Definition:Risk appetite | risk appetite]], [[Definition:Capital | capital]] position, and portfolio strategy.

📈 Getting treaty pricing right has far-reaching consequences for both sides of the transaction. For the cedent, overpaying erodes [[Definition:Underwriting profit | underwriting margins]], while underpaying — or accepting inadequate coverage terms — leaves dangerous [[Definition:Exposure | exposure]] on the balance sheet during adverse loss years. For reinsurers, mispricing a treaty can impair an entire book's performance for the duration of the contract period, sometimes multiple years. Market conditions play an outsized role: after major [[Definition:Catastrophic loss | catastrophe events]] or periods of sustained [[Definition:Underwriting loss | underwriting losses]], treaty pricing hardens significantly as [[Definition:Capacity | capacity]] tightens, whereas prolonged benign loss periods tend to drive competitive softening. The rise of [[Definition:Alternative capital | alternative capital]] from [[Definition:Insurance-linked securities (ILS) | ILS]] markets has added another pricing pressure, giving cedents additional leverage during renewals.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Reinsurance treaty]]
* [[Definition:Experience rating]]
* [[Definition:Exposure rating]]
* [[Definition:Ceding commission]]
* [[Definition:Catastrophe reinsurance]]
* [[Definition:Reinsurance broker]]
{{Div col end}}

Definition:Treaty pricing - Revision history

PlumBot: Bot: Creating new article from JSON