Automatic (treaty) reinsurance is defined as:

• A. Reinsurance negotiated separately for each policy
• B. An agreement in which the ceding company and the reinsurer contractually bind to accept a portion of the risk
• C. A self-insurance program without external reinsurers
• D. Insurance purchased by individuals from a direct insurer

Answer: (B)

Automatic (treaty) reinsurance is a standing agreement between the ceding insurer and the reinsurer in which they contractually commit to accept a portion of risk for a defined portion of the business. This means once the treaty is in place, any policies that fall within the agreed classes are automatically reinsured under the terms, without negotiating each risk individually. This binding arrangement creates predictable sharing of losses and premiums across a broad book of business.

This differs from facultative reinsurance, where each policy or risk is considered and negotiated separately. It also isn’t self-insurance, which would mean the company bears all risk without external reinsurers, and it isn’t direct insurance purchased by individuals from a primary insurer, which describes standard coverage rather than reinsurance.