South Dakota Crop Insurance Practice Exam

What is a characteristic feature of treaty reinsurance?

1. It requires case-by-case approval for each risk

2. It automatically applies to specified types of insurance

3. It involves a higher premium

4. It is limited to local markets

The correct answer is: It automatically applies to specified types of insurance

Treaty reinsurance is distinguished by its automatic application to specified types of insurance, which means that once a treaty is established between the primary insurer and the reinsurer, it covers all eligible policies that fall within the terms of that treaty without requiring individual approval for each new risk. This characteristic streamlines the process for insurers, allowing them to transfer risk efficiently and predictably across a range of policies without the need for case-by-case negotiations, which is common in facultative reinsurance. Therefore, the automatic nature of treaty reinsurance makes it a valuable tool for managing risk and maintaining liquidity within an insurance portfolio. Other options either suggest features of different types of reinsurance or highlight limitations that do not align with the fundamental principles of treaty reinsurance, reinforcing why the automatic application is a defining characteristic of this approach.