What is treaty insurance?

Treaty insurance refers to an arrangement whereby an insurer and a reinsurer enter into an agreement that automatically provides reinsurance coverage for a portfolio of risks without the need to negotiate individual contracts for each specific policy. This streamlined process helps insurers manage risk more effectively by providing a pre-established agreement that allows them to cede a portion of their insurance risk to the reinsurer automatically.

This approach is advantageous because it reduces the administrative burden and speeds up the ceding process, allowing insurers to focus on their core business operations while ensuring they have adequate reinsurance coverage in place. Treaty reinsurance is often used for larger reinsurers and is typically established over a period of time, rather than for single occurrences.

The other options pertain to different forms of reinsurance or coverage mechanisms. For instance, covering specific high-risk policies relates more to facultative reinsurance, where each risk is evaluated individually, rather than through a broad treaty framework. Negotiating policies for each risk also leans towards facultative arrangements. Meanwhile, temporary coverage during emergencies indicates a different kind of short-term insurance solution. All these options highlight different aspects or types of reinsurance that do not align with the automatic and portfolio-based nature of treaty insurance.