South Dakota Crop Insurance Practice Exam

What is a reinsurance contract that involves the automatic sharing of risks called?

1. Facultative Reinsurance

2. Retrospective Reinsurance

3. Treaty Reinsurance

4. Supplementary Reinsurance

The correct answer is: Treaty Reinsurance

Treaty reinsurance is a type of agreement in which an insurer automatically shares risks with a reinsurer without the need for individual assessments or negotiations for each specific risk. This arrangement is established by a contract known as a treaty, which outlines the terms under which risks are shared and the percentage of losses that will be ceded to the reinsurer. Because the sharing of risks occurs automatically based on the predetermined terms, it facilitates smoother operations for insurers, allowing them to manage their exposure and capacity more effectively. In contrast, facultative reinsurance involves the reinsurer evaluating each individual risk separately and deciding whether to accept it, which makes it less automatic than treaty reinsurance. Retrospective reinsurance focuses on past losses and is not concerned with future risks in the same way treaty reinsurance is. Supplementary reinsurance usually refers to additional coverages or enhancements rather than the mechanism of automatic risk-sharing standard in treaty arrangements. Thus, the characteristics of treaty reinsurance align perfectly with the concept of automatic risk sharing, making it the correct answer.