Which reinsurance contract between two insurers involves an automatic sharing of the risks assumed?

Treaty reinsurance is a type of reinsurance agreement in which two insurers automatically share the risks that arise from a specified category of policies. This arrangement means that the reinsurer agrees to accept a predetermined portion of all applicable insurance risks from the ceding insurer within the scope of the treaty, without the need for individual negotiations or acceptance of each policy. This automatic sharing mechanism allows for a more straightforward and streamlined approach to managing risk exposure, as it creates a long-term relationship between the insurers and facilitates greater efficiency in operations.

In contrast to treaty reinsurance, facultative reinsurance involves the reinsurer evaluating and accepting individual risks on a case-by-case basis. This means that the ceding insurer must seek approval for each specific risk it wishes to cede, making the process less automatic. Excess reinsurance, while also a form of treaty reinsurance, refers specifically to coverage for losses that exceed a specified limit, rather than encompassing a broad sharing of risks across various policies. Arbitrage reinsurance is not a standard term recognized in reinsurance practices, further distinguishing treaty reinsurance as the appropriate answer in relation to automatic risk sharing.