AD Banker Comprehensive Practice Exam

The reinsurance agreement that automatically accepts all new risks presented by the company seeking or requesting reinsurance from the reinsurer is known as a ____________ agreement.

1. Reciprocal

2. Facultative

3. Treaty

4. Residual

The correct answer is: Treaty

The agreement that automatically accepts all new risks presented by the company seeking reinsurance is known as a treaty agreement. This type of reinsurance creates a long-term relationship between the primary insurer and the reinsurer, where the reinsurer agrees in advance to cover certain types of risks that the primary insurer may present. Treaty reinsurance is advantageous because it provides certainty and stability for the primary insurer, as they need not negotiate individual terms for each risk; the terms are established in advance. This allows for more efficient management of risks, as the primary insurer can focus on its core operations without having to negotiate and underwrite each individual risk separately for reinsurance purposes. The context of the other types of agreements highlights the distinct nature of treaty agreements: facultative agreements, for instance, are negotiated on a case-by-case basis for specific risks, which does not offer the automatic acceptance feature. This makes treaty agreements a more streamlined and efficient way to handle large volumes of risks.