What characterizes facultative reinsurance?

What characterizes facultative reinsurance?

• A. It is applied to a broad range of policies automatically
• B. It is based on individual agreements for specific losses
• C. It covers all risks without exception
• D. It excludes high-value claims

Answer: (B)

Facultative reinsurance is characterized by individual agreements that are negotiated for specific risks or policies rather than applied automatically to a wide range of policies. This type of reinsurance allows insurers to transfer risk for particular, defined exposures, giving them flexibility to assess and accept risks on a case-by-case basis. Each agreement in facultative reinsurance is tailored to the individual policy, making it distinct from treaty reinsurance, which applies more broadly to a portfolio of policies. This allows the reinsurer to underwrite specific risks based on their merits and enhances the ability to manage exposure associated with high-risk or unusual policies.

Facultative reinsurance is characterized by individual agreements that are negotiated for specific risks or policies rather than applied automatically to a wide range of policies. This type of reinsurance allows insurers to transfer risk for particular, defined exposures, giving them flexibility to assess and accept risks on a case-by-case basis. Each agreement in facultative reinsurance is tailored to the individual policy, making it distinct from treaty reinsurance, which applies more broadly to a portfolio of policies. This allows the reinsurer to underwrite specific risks based on their merits and enhances the ability to manage exposure associated with high-risk or unusual policies.