How does facultative reinsurance work?

• A. In facultative reinsurance, who decides whether to accept or reject individual risks from the ceding company?
• B. The insured determine acceptance
• C. The ceding company determines acceptance
• D. No one decides; it's automatic

Answer: (B)

Facultative reinsurance operates on a case-by-case basis, with the primary insurer presenting individual risks to a reinsurer for consideration. Each risk is reviewed on its own merits, and the reinsurer decides whether to accept or reject that specific risk based on factors like exposure, underwriting requirements, and pricing. The insured has no role in this decision, and the ceding company does not unilaterally bind or reject the risk on its own. If the reinsurer accepts, terms are negotiated and the risk is shared; if not, the primary insurer may retain the risk or seek another reinsurer. This approach is distinct from automatic or treaty reinsurance, which involves a standing agreement covering a portfolio of risks.