What is Treaty Reinsurance, and Why Does Aviation Need It?

What happens when a single event can generate losses worth billions of dollars?

From commercial airlines carrying hundreds of passengers to aircraft manufacturers operating in highly regulated environments, the aviation industry faces risks that are infrequent but potentially catastrophic. To absorb these exposures and keep the market functioning, insurers rely on one of the reinsurance industry's most important tools: treaty reinsurance.

To better understand how treaty reinsurance works, and why it is particularly well suited to aviation, we spoke with Arta Nasradini, Head of Aviation Reinsurance at SCOR.

What is treaty reinsurance?

In simple terms, treaty reinsurance allows an insurer to transfer a predefined portion of a portfolio of risks to a reinsurer, rather than negotiating coverage for each individual policy separately.

"It is a combination of many risks. Instead of looking at individual policies one by one, insurers bundle them together and transfer part of that portfolio to reinsurers," Arta says.

Treaty reinsurance generally falls into two categories:

• Proportional treaty reinsurance 
  Under a proportional arrangement, the reinsurer participates in a fixed percentage of every policy within the ceded portfolio. Premiums and losses are shared in the same proportion. For example, if a reinsurer assumes a 10% share of the portfolio, it receives 10% of the premium income and is responsible for 10% of the claims arising from that portfolio. In exchange for transferring the business, the insurer receives a ceding commission, typically intended to cover acquisition and administrative expenses.
• Non-proportional treaty reinsurance
  Also known as excess-of-loss reinsurance, this structure activates only when losses exceed a predetermined threshold. For example, a treaty may provide $20 million of coverage above a retention level of $10 million. The reinsurer only becomes involved when losses exceed that $10 million retention, up to the treaty limit.

The main alternative to treaty reinsurance is facultative reinsurance, where coverage is negotiated individually for specific peak risks rather than automatically covering an entire portfolio.

Is treaty reinsurance used only in aviation?

Not at all.

Treaty reinsurance is widely used across property and casualty (P&C) businesses, particularly in sectors where insurers manage large portfolios of risks or where potential losses can be severe.

According to Arta, treaty structures are particularly valuable in industries where a single event can generate exceptionally large claims. Beyond airlines, aviation treaty reinsurance also supports:

• Aircraft manufacturers such as airframe or engine manufacturers
• Airports and airport service providers
• Manufacturers of aircraft components
• Those leasing aircrafts
• General aviation operators

The common denominator is exposure to high-value assets and potentially severe liabilities.

Why is treaty reinsurance so important in aviation?

Aviation may be one of the safest forms of transportation, but when losses occur, they can be extraordinarily tragic and costly .

"Flying is still the safest place to be," says Arta. "But if something happens, the severity is very, very large."

Consider a major airline accident involving hundreds of passengers. Beyond the aircraft itself, insurers may face claims related to passenger injuries or fatalities, property damage, and third-party liability. The financial impact can quickly reach billions of dollars.

As a result, aviation companies purchase very high insurance limits. According to Arta, airline insurance programs can provide between USD 1 – 3 billion in coverage under a single policy, while manufacturers may purchase limits exceeding USD 3 billion. By spreading risk across the reinsurance market, treaty reinsurance enables insurers to offer the large coverage limits required by the aviation industry while preserving the financial stability of their portfolios. Without such risk transfer, many aviation risks would be beyond the capacity that a single insurer is willing to provide.

When are treaty contracts typically used?

Treaty contracts are most valuable when insurers need consistent access to capacity across a broad portfolio of business. Rather than arranging separate reinsurance solutions for each risk, they can rely on a standing agreement covering multiple policies.

In aviation, treaty reinsurance is especially important because insurers need to manage:

• Large and complex exposures
• Significant regulatory insurance requirements
• Highly concentrated risks
• Potentially catastrophic losses arising from a single event

For local insurers, treaty reinsurance also serves another crucial purpose: enabling them to write larger aviation risks and expand their business beyond their domestic markets. By transferring part of the risk to global reinsurers, they gain access to capacity they would otherwise be unable to offer.

Do treaty contracts differ between Europe and the United States?

While legal and regulatory frameworks vary by jurisdiction, Arta notes that treaty reinsurance contracts themselves are often highly standardized.

Differences tend to arise from local laws, claims handling practices and regional market conditions, particularly on the general aviation side. Major airline and manufacturer risks, meanwhile, are often placed in international markets where established standards create significant consistency across contracts.

For reinsurers like SCOR, this standardization helps facilitate global partnerships and long-term relationships with clients.

How is a treaty contract structured?

Building a successful treaty contract requires much more than simply deciding how much risk to transfer.

Key considerations include:

• Portfolio diversification 
  According to Arta, one of the most important considerations is the composition of the underlying portfolio. Portfolio diversification supports a more balanced risk profile by spreading exposures across different business segments and loss patterns.
  The best performing aviation treaty contracts will contain multiple sub-segments, including airlines, manufacturers, airports, and general aviation. Maintaining a balanced mix helps improve long-term sustainability.
• Transparent data sharing 
  Strong partnerships depend on detailed information about risks, claims performance, and portfolio development. Transparency allows reinsurers to assess exposure accurately and make informed decisions.
• Contract terms and conditions 
  The structure of commissions, profit-sharing arrangements, and coverage triggers can significantly influence outcomes for both parties.
• Long-term sustainability 
  Market conditions change over time, making it important for both insurers and reinsurers to adapt while maintaining a fair balance between risk and reward.

"It has to be a win-win for both sides," Arta says.

Why does treaty reinsurance benefit both insurers and reinsurers?

Due to the volatile nature of the aviation insurance results, reinsurance plays a critical role in stabilizing earnings by transferring risk to the global reinsurance market. For many insurers, the answer is straightforward: treaty reinsurance provides the capacity needed to underwrite business that would otherwise exceed their balance sheet strength or require significant capital to be held against potential future losses. In aviation, where clients often require insurance limits in billions of dollars, reinsurance is a fundamental enabler of market participation. For reinsurers such as SCOR, aviation provides access to a diversified and globally connected line of business that can deliver attractive returns when managed with discipline and strong underwriting standards.

Success depends on understanding complex risks, maintaining close relationships with clients, and continuously adapting to changing market conditions.

As global air traffic continues to grow and aviation remains essential to connecting people and economies, treaty reinsurance will continue playing a critical role behind the scenes, helping insurers absorb risk, supporting industry growth and ensuring that even the largest exposures can be shared across the global market.

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