What distinguishes facultative reinsurance from treaty reinsurance?

What distinguishes facultative reinsurance from treaty reinsurance?

• A. Facultative reinsurance is automatic, treaty is selective
• B. Facultative reinsurance requires individual risk submission, treaty does not
• C. Facultative reinsurance is less regulated than treaty reinsurance
• D. Facultative reinsurance covers large policies, treaty covers small ones

Answer: (B)

Facultative reinsurance is characterized by its requirement for individual risk submission, which means that for each risk or policy, the reinsurer must review and accept or decline the risk based on its own assessment. This process allows the reinsurer to be selective about which risks it wants to take on, leading to tailored arrangements for specific policies. In contrast, treaty reinsurance involves an agreement that automatically covers a specific group of risks as defined in the treaty. This means that once the treaty is in place, the reinsurer is obligated to accept all policies that fall within the agreed parameters, irrespective of individual risk evaluation. This distinctive requirement in facultative reinsurance to submit risks individually is what sets it apart from treaty reinsurance, and it reflects the flexibility that can be afforded when dealing with larger, unique, or higher-risk policies that may not fit into a general automatic agreement.

Facultative reinsurance is characterized by its requirement for individual risk submission, which means that for each risk or policy, the reinsurer must review and accept or decline the risk based on its own assessment. This process allows the reinsurer to be selective about which risks it wants to take on, leading to tailored arrangements for specific policies.

In contrast, treaty reinsurance involves an agreement that automatically covers a specific group of risks as defined in the treaty. This means that once the treaty is in place, the reinsurer is obligated to accept all policies that fall within the agreed parameters, irrespective of individual risk evaluation.

This distinctive requirement in facultative reinsurance to submit risks individually is what sets it apart from treaty reinsurance, and it reflects the flexibility that can be afforded when dealing with larger, unique, or higher-risk policies that may not fit into a general automatic agreement.