Insurance Broker Certification Practice Exam

What does facultative reinsurance involve?

1. Automatic coverage for all policies

2. Reinsurance purchased for specific policies

3. General reinsurance agreements

4. Exclusivity to ceding insurers only

The correct answer is: Reinsurance purchased for specific policies

Facultative reinsurance specifically involves the arrangement of reinsurance for individual risks or specific policies rather than on an automatic basis. In this arrangement, the primary insurer (ceding insurer) can evaluate each policy on its own merits and decide whether to seek reinsurance coverage for that particular policy. This allows for more tailored management of risks since the ceding insurer can negotiate the terms, coverage limits, and pricing independently for each individual case. In contrast, automatic coverage typically refers to treaty reinsurance, where the reinsurer agrees to accept certain classes of business without the need for individual negotiations. General reinsurance agreements may cover a portfolio of policies rather than focusing on specific ones. The concept of exclusivity to ceding insurers pertains more to arrangements and does not accurately describe the nature of facultative reinsurance, which can apply as needed without exclusivity constraints. Thus, facultative reinsurance is recognized for its granularity and flexibility in addressing specific risk scenarios.