Answer
Facultative reinsurance is coverage purchased by a primary insurer for a single, specific risk or policy (such as a high-value building, oil rig, or airliner). Unlike treaty reinsurance—which automatically covers a broad portfolio or class of risks—facultative reinsurance is negotiated individually, allowing both parties to evaluate and price the specific hazard on a case-by-case basis.
Key CharacteristicsIndividual Risk Underwriting: Each policy or exposure is submitted to the reinsurer separately.
No Obligation on Either Side:
The primary insurer is not required to offer the risk to the reinsurer.
The reinsurer retains the absolute right to accept, reject, or negotiate terms for the individual risk.
Tailored Terms: Premium rates, terms, and coverage limits are customized strictly for that single exposure.
Facultative vs. Treaty Reinsurance
| Feature | Facultative Reinsurance | Treaty Reinsurance |
| Scope | Single, specific risk/policy | Entire portfolio or line of business |
| Obligation | Optional for both insurer and reinsurer | Mandatory for both once treaty is active |
| Underwriting | Case-by-case by the reinsurer | Underwritten in bulk based on insurer's guidelines |
| Admin Effort | High per policy | Low per policy |
| Primary Use | Exceptional, high-value, or unusual risks | Routine, day-to-day risk management |