What is facultative reinsurance and how does it differ from treaty reinsurance?

• A. Facultative reinsurance covers individual risks on an ad hoc basis; treaty reinsurance covers a portfolio of risks under a standing agreement.
• B. Facultative reinsurance covers a portfolio of risks under a standing agreement.
• C. Facultative is used only for life; treaty is for property.
• D. Facultative reinsurance is automatic; treaty requires underwriting.

Answer: (A)

This question tests the distinction between facultative and treaty reinsurance. Facultative reinsurance covers individual risks on an ad hoc basis—the ceding insurer submits each risk one by one, and the reinsurer decides whether to accept that specific risk and on what terms. It’s used when a risk is unusual or falls outside a standing agreement’s scope, so each risk is evaluated separately.

Treaty reinsurance, on the other hand, covers a portfolio of risks under a standing agreement. Once the treaty is in place, a defined portion of all risks within that portfolio is automatically reinsured according to the treaty terms, without needing to submit each risk individually. It provides ongoing, generalized reinsurance for a block of business.

So the best answer captures that facultative handles individual risks on an as-needed basis, while treaty covers a portfolio of risks under a standing agreement. The other statements mix up scope, usage, or how the two types operate.