Facultative reinsurance is a type of reinsurance that requires the reinsurer to evaluate each individual risk before agreeing to accept it. This approach allows the reinsurer to assess the specific terms and conditions of the particular policy being reinsured, including its coverage limits, premiums, and the underlying risks. By doing so, the reinsurer can decide whether to accept or decline the risk based on its own underwriting criteria and appetite for risk.
In this arrangement, the primary insurer has the flexibility to seek reinsurance for specific policies or risks that may be considered too large or too uncertain to retain in full. This enables a more tailored approach to reinsurance, making it well-suited for unique or high-value risks that may not fit into blanket treaties that cover a wide range of policies.
In contrast, treaty reinsurance involves agreements that automatically cover a range of policies without the need for individual risk assessment, making the process more streamlined but less flexible concerning unique risks. Other terms such as obligatory and non-facultative are often variations of treaty arrangements, but they do not emphasize the individualized risk evaluation that characterizes facultative reinsurance.