What is Treaty Reinsurance Pricing?
Treaty reinsurance pricing is the process by which a reinsurer calculates the premium it requires to provide coverage to a cedent under a treaty arrangement. Unlike facultative reinsurance — which prices individual risks — treaty pricing covers an entire portfolio of risks under agreed terms.
The pricing process is data-intensive. A reinsurer must analyse years of historical loss experience, assess current exposure levels, apply actuarial adjustments for trend and development, and benchmark against market rate-on-line levels — all before making a pricing decision.
Until recently, assembling all the necessary data could take a pricing actuary or underwriter 2–5 days per treaty renewal. AI agents now automate the data gathering and calculation steps entirely, leaving actuaries to focus on judgement rather than spreadsheet construction.
Treaty Pricing Methods
Burning Cost
XoL treaties with 5+ years of experienceCalculates the historical rate of loss within the reinsurance layer. Actual layer losses are divided by the subject premium for each year of the experience period, then trended, developed for IBNER, and loaded for expenses and profit.
Burning Cost = Layer Losses ÷ Subject Premium × 100Exposure Rating
New programmes, low-frequency classesPrices the treaty based on the underlying risk profile rather than historical loss experience. Industry loss severity curves are applied to the cedent's exposure distribution to estimate expected losses within the reinsurance layer.
Layer Loss Cost = ∑ (Exposure × Layer Loss Factor from ILF curve)Blended Rating
Most standard XoL renewalsCombines burning cost and exposure rating with credibility weighting based on the volume and quality of loss experience. More weight given to burning cost when experience is credible; exposure rating dominates when experience is sparse.
Blended Rate = (Z × Burning Cost) + ((1−Z) × Exposure Rate)Proportional Commission Adequacy
Quota share and surplus share treatiesFor proportional treaties, pricing focuses on the adequacy of the ceding commission relative to the cedent's expense ratio, combined ratio, and profit commission structure.
Break-even Commission = 100% − Expected Loss Ratio − Reinsurer ExpensesData Requirements for Treaty Pricing
The completeness and quality of cedent data is the single biggest driver of pricing accuracy. The following table shows what is needed and how AI agents accelerate collection:
| Data Type | Min. Period | Manual Time | With AI |
|---|---|---|---|
| Subject Premium Income (SPI) | 5–10 years | 30 min | 2 min |
| Paid & incurred loss history | 5–10 years | 2–4 hours | 15 min |
| Large loss detail | 5–10 years | 1–2 hours | 10 min |
| Development triangles | 10+ years | 3–6 hours | 20 min |
| Exposure schedule (SI dist.) | Current year | 1–2 hours | 10 min |
| Geographic breakdown | Current year | 30 min | 5 min |
| Reinstatement provisions | Treaty terms | 15 min | 2 min |
AI Automation in Treaty Pricing
The Reinsured.AI pricing agent handles the full data pipeline — from raw cedent documents to a populated pricing template — in under two hours:
Upload bordereaux, loss runs, ACORD forms, or proprietary spreadsheets. The agent extracts structured data from any layout without templates or configuration.
Cross-references extracted figures against prior-year data, flags inconsistencies, and identifies IBNER patterns in development triangles automatically.
Runs year-by-year burning cost at each attachment point, applies trend and development factors, and produces a technical rate recommendation.
Produces a structured memo with full data sources, assumptions, sensitivity tables, and market ROL benchmarks — ready for actuary sign-off.
Proportional vs Non-Proportional Pricing
Proportional
Is the commission adequate given the cedent's loss ratio, expense base, and profit commission structure?
Auto-extract historical combined ratios, model commission adequacy across loss ratio scenarios, flag adverse development.
Non-Proportional
What premium is required to cover expected layer losses plus expenses and target profit — as a percentage of the limit?
Burning cost calculation, ILF overlay, IBNER adjustment, reinstatement modelling, and ROL benchmarking.
Market Rate on Line Benchmarks
| Class | Layer | Typical ROL Range | Pricing Method |
|---|---|---|---|
| Property CAT | 1st loss layer | 8–15% | Exposure / Burning Cost |
| Property CAT | Upper layers | 2–6% | Exposure Rating |
| Liability XoL | Working layer | 10–20% | Burning Cost |
| Marine XoL | 1st layer | 5–12% | Burning Cost |
| Motor XoL | Per risk | 3–8% | Burning Cost |
| Quota Share (Property) | N/A | Commission 25–35% | Commission Adequacy |
Indicative ranges only. Actual pricing depends on loss experience, exposure profile, and prevailing market conditions.
Frequently Asked Questions
What is burning cost in treaty reinsurance pricing?
Burning cost is the most common method for pricing excess of loss reinsurance treaties. It calculates the historical rate of loss within a specific reinsurance layer by dividing the actual losses attaching to the layer by the total subject premium over the experience period (typically 5–10 years). The result is adjusted for trend, development, and IBNER to produce a projected burning cost rate.
What is exposure rating in reinsurance?
Exposure rating prices a reinsurance treaty based on the underlying risk characteristics rather than historical loss experience. It uses industry loss curves to estimate the expected loss within the reinsurance layer based on the cedent's premium volume, line of business, and geographic concentration. Exposure rating is preferred when loss experience is limited or immature.
How is AI used in treaty pricing?
AI agents automate the most time-consuming parts of treaty pricing: extracting and cleansing historical loss data from bordereaux and loss runs, populating burning cost templates from structured and unstructured data sources, flagging data quality issues and IBNER patterns, running sensitivity analyses across attachment points and rate-on-line assumptions, and generating pricing memos with full audit trails. This reduces pricing preparation time from days to hours.
What data is needed to price a reinsurance treaty?
To price a reinsurance treaty you need: subject premium income by year (minimum 5 years, ideally 10), historical loss data paid and incurred with large loss detail, exposure data including sums insured distribution and geographic breakdown, development triangles for long-tail classes, and current portfolio structure. AI agents can extract all of this from cedent-provided documents automatically.
What is rate on line in excess of loss reinsurance?
Rate on line (ROL) is the reinsurance premium expressed as a percentage of the reinsurance limit. For example, an XoL layer of $10M xs $10M priced at $500,000 has an ROL of 5%. The minimum rate on line (MROL) is the minimum premium charged to make a layer economically viable regardless of burning cost.
How long does treaty pricing take with AI automation?
Manual treaty pricing typically takes 2–5 days per renewal. With AI automation, data gathering, extraction, and template population complete in under 2 hours. Actuaries review and adjust the AI-generated analysis rather than building it from scratch — reducing total pricing time by 70–85% per treaty.
What is IBNER and why does it matter in treaty pricing?
IBNER (Incurred But Not Enough Reported) is the development on known claims that have been reported but not fully reserved. In long-tail classes like liability and workers' compensation, IBNER can significantly exceed IBNR. Correctly adjusting historical burning costs for IBNER is critical — understating IBNER leads to underpriced treaties. AI agents identify IBNER patterns from development triangles automatically.
What is the difference between proportional and non-proportional treaty pricing?
Proportional treaties (quota share, surplus share) are priced based on the ceding commission adequacy relative to the cedent's loss ratio and expense base. Non-proportional treaties (XoL, stop loss) are priced using burning cost or exposure rating to determine the premium for a specific layer of loss. AI tools handle both: commission adequacy analysis for proportional, burning cost and exposure rating for non-proportional.
Automate your treaty pricing pipeline
The Reinsured.AI pricing agent extracts, cleanses, and calculates — so your actuaries price more treaties in less time.