What distinguishes facultative reinsurance?

Facultative reinsurance is characterized by the fact that each policy is negotiated separately. This means that when a primary insurer has a specific risk that they wish to transfer to a reinsurer, they will negotiate the terms for that particular policy. This allows for customization based on the unique characteristics of the risk being ceded.

In facultative reinsurance, the reinsurer evaluates each risk on a case-by-case basis, which can lead to different terms, coverage limits, and prices for different policies, depending on the nature and likelihood of the risk associated with each one. This approach contrasts with treaty reinsurance, where a blanket agreement covers a wide range of policies without individual negotiations for each one.

This aspect of facultative reinsurance makes it a flexible option for primary insurers when they want to manage specific risks that may not fit into their general reinsurance agreements. Understanding this process is essential for professionals dealing with insurance and risk management, as it highlights how risks can be more finely tailored and managed through individual agreements.