South Dakota Crop Insurance Practice Exam

What is a primary benefit of treaty reinsurance for an insurer?

1. Increased premium income

2. Consistency in sharing risks automatically

3. Reduction of claim processing time

4. More competitive policy offerings

The correct answer is: Consistency in sharing risks automatically

The primary benefit of treaty reinsurance for an insurer is the consistency in sharing risks automatically. Treaty reinsurance establishes a contractual agreement between the primary insurer and the reinsurer, where the reinsurer agrees to accept a predetermined portion of the insurer's risk for all policies within a specified category or line of business. This automatic sharing of risk allows the insurer to stabilize its loss exposure and spread potential large losses over multiple parties. By doing so, it helps the insurer maintain solvency and increases its capacity to underwrite more policies since the reinsurer provides a safety net for losses. This mechanism of automatic risk sharing also enhances the insurer's ability to plan and predict financial obligations from claims, as the reinsurer’s participation is predetermined based on the treaty agreement. Other benefits, such as increased premium income or a reduction in claim processing time, may result from more effective risk management, but they are secondary to the fundamental benefit of consistent and automatic risk sharing that a treaty provides.