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The most common reinsurance contract that involves automatic risk sharing is known as treaty reinsurance. This type of reinsurance arrangement allows the ceding insurer to transfer a specified portion of its risk to the reinsurer automatically, without the need for the ceding insurer to negotiate individual agreements for each policy.

Under a treaty reinsurance agreement, the reinsurer agrees to accept all risks within a defined category or for policies written during a specified time period. This automatic coverage is advantageous for insurers, as it provides them with a reliable mechanism for managing their overall risk exposure while enabling them to offer more coverage options to policyholders.

Proportional reinsurance, while it does involve sharing risk, specifically refers to the arrangement where the reinsurer receives a predetermined percentage of the premiums and pays a corresponding percentage of claims. Excess-of-loss reinsurance focuses on covering claims that exceed a certain threshold, providing a different mechanism that does not emphasize automatic risk sharing for all policies. Facultative reinsurance, on the other hand, involves the reinsurer reviewing and accepting risk on a case-by-case basis, which lacks the automatic nature of treaty agreements. Therefore, the essence of treaty reinsurance lies in its capacity for comprehensive and automatic risk sharing, distinguishing it significantly from the other