Insurance Broker Certification Practice Exam

What is characteristic of a reinsurance treaty?

1. It is negotiated per individual policy

2. It is an automatic agreement between insurers

3. It requires direct consumer involvement

4. It often leads to increased premiums

The correct answer is: It is an automatic agreement between insurers

A reinsurance treaty is characterized as an automatic agreement between insurers. This means that once the treaty is established, it automatically governs the reinsurance of specific risks without the need for further negotiation on each individual policy. This automaticity provides both the ceding insurer and the reinsurer with a framework that streamlines the process of transferring risk. In reinsurance treaties, terms are agreed upon in advance, covering the types of risks to be reinsured, the sharing of losses, and other key conditions. As a result, as new policies are issued by the ceding insurer that fall within the risk categories specified in the treaty, they are automatically included under the agreed terms, facilitating efficient risk management. Other options touch on elements that do not accurately describe the nature of reinsurance treaties. For instance, negotiating terms for each individual policy would contradict the essence of a treaty, which is intended to provide broader coverage with predefined terms. The idea of requiring direct consumer involvement misrepresents the process, as the treaty operates solely between insurers and does not involve policyholders directly. Finally, while it is true that reinsurance can impact premiums, the suggestion that it often leads to increased premiums does not specifically define the nature of a reinsurance treaty itself. Instead, re