What is facultative reinsurance?

Facultative reinsurance is defined as the reinsurance of individual risks on a case-by-case basis, allowing the primary insurer to submit specific risks to the reinsurer for consideration. The reinsurer has the discretion to accept or reject each proposed risk. This flexibility is beneficial because it enables insurers to manage their risk exposure on a tailored basis rather than adhering to blanket agreements for multiple policies.

This method is particularly useful when dealing with unique or high-value risks that don't fit standard criteria, offering a way for insurers to obtain coverage for specific liabilities without being locked into long-term arrangements. For instance, if an insurer underwrites a high-value property, they might seek facultative reinsurance to mitigate potential losses associated with that specific property.

In contrast, other options either refer to broader concepts of insurance agreements or mechanisms that do not precisely capture the nature and function of facultative reinsurance.