What defines treaty reinsurance?

Treaty reinsurance is defined as a type of reinsurance arrangement where the ceding insurer automatically cedes a specified set of risks to the reinsurer under pre-agreed terms for all qualifying business types. This creates a framework that allows for substantial flexibility and security for both parties, as it provides automatic coverage without the need for individual negotiations for each policy.

This type of arrangement simplifies the underwriting process for insurers, allowing them to manage their risk exposure more effectively. Under treaty reinsurance, there is a broader, more systemic approach taken toward risk management, enabling insurers to transfer risk based on agreed criteria without the need for reviewing each individual policy or risk.

In contrast, other options describe arrangements that are not characteristic of treaty reinsurance. For instance, arranging reinsurance for specific high-risk policies refers more to facultative reinsurance, where individual policies are assessed and reinsured on a case-by-case basis. Reinsuring each policy individually also aligns with facultative reinsurance. Meanwhile, informal agreements lack the formal structure and terms characteristic of treaty reinsurance, which is defined by its automatic, systematic ceding of risks under specific conditions.