Final answer:
The reinsurance contract between two insurers that involves an automatic sharing of risks assumed is Quota Share Reinsurance. This type of contract allows for the proportional sharing of premiums and losses based on a set percentage, differing from other types such as Facultative, Excess of Loss, and Treaty Reinsurance, which have specific conditions for risk sharing.
Step-by-step explanation:
In answering which reinsurance contract between two insurers involves an automatic sharing of risks assumed, it's important to understand the different types of reinsurance agreements available. Option 2: Quota Share Reinsurance is the type of contract that involves an automatic sharing of risks. In a quota share arrangement, the ceding company (the primary insurer) and the reinsurer agree to share the premiums and losses of a particular book of business, in proportion to a set percentage. This is different from Facultative Reinsurance, which is arranged on an individual policy basis, where the ceding company retains a facultative right to decide which risks it wants to reinsure and the reinsurer has the right to accept or decline those individual risks. Excess of Loss Reinsurance provides that the reinsurer will only pay losses that exceed a specified amount, which is not based on a sharing percentage but on the excess loss above the specified deductible or retention limit. Lastly, Treaty Reinsurance can involve either a quota share or an excess of loss arrangement, but the key characteristic is that it covers a whole portfolio of risks, rather than individual risks or policies, so it can be considered a form of automatic sharing if it's a quota share treaty.