Automatic non-proportional reinsurance is a reinsurance arrangement that applies when losses exceed a defined attachment point, without a separate manual placement for each policy period.
Core Mechanics
The treaty automatically transfers portions of large losses above a retention level from the ceding insurer to the reinsurer. Unlike proportional arrangements, the reinsurer is primarily exposed to severity risk above a threshold, often with fixed limits and participation percentages.
Why Insurers Use It
It smooths capital shocks from catastrophe or accumulation events. Non-proportional protection can reduce volatility in the loss ratio and protect solvency by limiting extreme-loss exposure.
Claims and Settlement
When a loss exceeds attachment, the cedant reports claims data, loss history, and covered peril definitions. The reinsurer verifies policy wording and aggregation rules because threshold calculations drive both payment timing and recoverable loss.
Regulatory Context
Reinsurance treaties are also a risk-management tool for regulatory capital frameworks. Internal controls require documentation of collateral, collateral quality, and recoverable asset treatment where required by state or NAIC-style solvency reporting.
Practical Example
A regional insurer issues liability policies with a $2 million retention on large industrial losses. An industrial fire produces $4.5 million in covered losses. Under an automatic non-proportional structure with a $2 million attachment, the insurer keeps $2 million and cedes the next layer based on treaty terms, with the reinsurer receiving claim data immediately through the claims feed.