Alberta General Insurance Level 1 Practice Exam

Treaty reinsurance serves the primary purpose of establishing a pre-agreed arrangement between an insurer and a reinsurer, where the reinsurer automatically accepts certain portions of risk within specified classes of business. This arrangement simplifies the risk management process for the insurer, allowing them to write new policies without needing to individually negotiate reinsurance for each one. By doing so, treaty reinsurance creates stability and predictability in the insurance sector, as the insurer knows in advance how much of its liabilities will be covered by the reinsurer. In treaty reinsurance, the insurer and reinsurer agree on the terms, limits, and conditions in advance, which streamlines claims handling and improves operational efficiency. The reinsurer is obligated to accept the designated portion of risk as outlined in the treaty whenever it is ceded by the insurer. The other options do not align with the purpose of treaty reinsurance. While assessing individual risks is important in other contexts, treaty arrangements are designed to cover groups of policies rather than each one on a case-by-case basis. The option that suggests treaty reinsurance eliminates the need for reinsurance does not hold since treaty reinsurance is a form of reinsurance. Lastly, covering only those risks exceeding a certain threshold pertains more to excess of loss reinsurance