What is facultative reinsurance?

• A. Reinsurance that is negotiated separately for each insurance contract
• B. A treaty that covers all policies automatically
• C. Reinsurance negotiated only for large commercial risks
• D. A form of insurance where the insured pays a premium to the reinsurer

Answer: (A)

Facultative reinsurance means transferring risk on a per-claim, per-policy basis, with terms negotiated separately for each individual insurance contract. The reinsurer reviews and accepts or rejects that specific risk and sets the reinsurance terms for it alone. This differs from treaty reinsurance, where a blanket agreement automatically covers a whole book of policies without negotiating each one individually. While facultative arrangements are often used for unusual or large risks, they’re not limited to large commercial lines. Also, premiums flow between insurers, not directly from the insured to the reinsurer.