What type of reinsurance contract involves two companies automatically sharing their risk exposure?

A treaty reinsurance contract is a type of agreement where two companies, typically a primary insurer and a reinsurer, automatically share a specified portion of risk exposure across a defined group of policies. This arrangement allows for a streamlined process where the primary insurer can cede a pre-defined share of risk to the reinsurer without negotiating individual agreements for each policy.

The characteristics of treaty reinsurance include a commitment from both parties on the terms of risk sharing, which may encompass all policy types written in a specific class or category. This ensures that the primary insurer has some reassurance against losses and can manage its risk more effectively over time.

In contrast, facultative reinsurance involves the reinsurer considering each individual policy that the primary insurer wants to reinsure, making it less automatic and less efficient for large volumes of business. Proportional reinsurance is a broader category that can apply to treaty contracts, but it refers more specifically to how losses and premiums are shared rather than the automatic nature of the risk-sharing arrangement. Excess reinsurance focuses on covering losses above a certain threshold rather than sharing risks automatically across a pool of policies.

Thus, the treaty contract is the best fit for a scenario where two companies jointly and automatically share their risk exposure.