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Posted On: May. 27, 2007 12:00 AM CST

Treaty and facultative contracts are the two basic types of reinsurance. Both contracts may be written on a proportional or an excess of loss basis, or a combination of both.

A reinsurance treaty is a broad agreement covering some portion of a particular class or classes of business, for example, an insurer's entire workers compensation or property book of business. Reinsurance treaties automatically cover all risks written by the insured that fall within treaty terms unless they specifically exclude exposures. While treaty reinsurance does not require review of individual risks by the reinsurer, it demands a careful review of the underwriting philosophy, practice and historical experience of the ceding insurer.

Facultative reinsurance contracts cover individual underlying policies and are written on a policy-specific basis. A facultative agreement covers a specific risk of the ceding insurer. A reinsurer and ceding insurer agree on terms and conditions in each individual contract. Facultative reinsurance agreements often cover catastrophic or unusual risk exposures.

Because it is so specific, facultative reinsurance requires the use of substantial personnel and technical resources for underwriting individual risks.

Source: Reinsurance Assn. of America