What is treaty reinsurance characterized by?

Treaty reinsurance is characterized by a framework where the primary insurance company cedes certain classes of its business to the reinsurer. This arrangement involves a long-term agreement that specifies which types or classes of risks will be reinsured, allowing the primary insurer to transfer the risk associated with those classes to the reinsurer automatically, without the need to negotiate individual contracts for each risk or claim.

This type of reinsurance provides broad coverage and a simplified process, as it encompasses all policies within the specified classes during the treaty period. The reinsurer agrees to accept all the risks outlined in the treaty, which allows for better capital management and risk distribution for the primary insurer.

In contrast, a one-time agreement does not provide the long-term and systematic coverage characteristic of treaty reinsurance. Additionally, the transfer of individual claims pertains more to facultative reinsurance rather than treaty reinsurance, where specific claims may be negotiated individually rather than through an overarching treaty. Lastly, a policy limited to specified risks aligns more with facultative arrangements as well, as treaty reinsurance commonly covers a broad range within designated classes, rather than being limited to specific individual risks.