Definition:Non-proportional treaty
🔺 Non-proportional treaty is a type of reinsurance arrangement in which the reinsurer responds only when losses exceed a predetermined threshold, known as the attachment point or retention, rather than sharing in every loss from the first dollar as in proportional reinsurance. The most common forms are excess of loss treaties — structured on a per-risk, per-occurrence, or aggregate basis — and stop loss treaties that cap the cedant's overall loss ratio for a defined period. Non-proportional treaties are a cornerstone of reinsurance program design worldwide, from Lloyd's syndicates in London to large domestic carriers in Japan, Germany, and the United States.
⚙️ Structurally, a non-proportional treaty defines a specific layer of coverage — for example, $10 million in excess of a $5 million retention — and the reinsurer pays only the portion of a loss that falls within that layer. The ceding company retains all losses below the attachment point and, if the layer has a finite limit, also bears any losses above the layer's ceiling unless a higher layer is in place. Pricing is expressed as a reinsurance premium rather than as a share of the original premium, and it reflects modeled expected losses, historical loss experience, and market conditions. Reinstatement provisions — which specify whether and at what cost the layer's limit can be restored after a loss — are a critical negotiating point, particularly for catastrophe excess of loss covers where a single event can exhaust the full limit.
📐 From a strategic perspective, non-proportional treaties allow insurers to precisely calibrate how much volatility they are willing to accept, making them essential tools for capital management and solvency optimization. Under Solvency II, the risk-mitigating effect of non-proportional reinsurance directly reduces the SCR, and similar recognition exists under the RBC framework in the U.S. and C-ROSS in China. Because the reinsurer's exposure is confined to a specific loss band, non-proportional treaties can concentrate credit risk — if the reinsurer defaults on a large loss, the cedant's retained exposure spikes dramatically. This concentration makes reinsurer security evaluation and collateralization provisions particularly important in non-proportional placements.
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