What type of reinsurance contract involves automatic sharing of the risk assumed between two insurers?

Treaty reinsurance is a type of reinsurance contract where there is an automatic agreement for sharing risks between two insurers. This arrangement is continuous and covers a portfolio of business rather than individual risks. Under treaty reinsurance, the ceding insurer (the insurer transferring the risk) agrees to cede, and the reinsurer agrees to accept, a predetermined portion of specified types of risk. This automatic sharing process helps stabilize both parties' respective underwriting results and can lead to more predictable cash flows and risk management.

In contrast, some of the other options represent different types of risk-sharing that do not offer the same automatic and wide-ranging coverage. For example, quota share reinsurance involves sharing a fixed percentage of all policies in a specific line of business; surplus reinsurance covers specific portions of larger risks over a certain limit, and facultative reinsurance is negotiated on a case-by-case basis for individual risks rather than through a continuous agreement.

Thus, treaty reinsurance serves as a comprehensive mechanism that facilitates ongoing risk sharing between insurers, making it distinct from the other types mentioned.