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CMA Final · Risk Management in Banking and Insurance · Structure and Type of Re-insurance

Which statement best describes facultative reinsurance as distinct from treaty reinsurance?

Facultative reinsurance is placed individually for each risk, and the reinsurer can accept or refuse it. In a treaty, the reinsurer is obliged to take all business falling within the agreed terms. Facultative cover can be proportional or non-proportional.

  1. AThe insurer and reinsurer agree on each individual risk separately, and the reinsurer may accept or decline itCorrect
  2. BThe reinsurer must accept all risks within the agreed class automatically
  3. CIt can only be written on a proportional basis
  4. DIt is arranged only after a loss has occurred

Explanation

Facultative reinsurance is negotiated risk by risk, so the reinsurer has freedom to accept or reject. Treaty reinsurance binds the reinsurer to accept all business within the agreed terms. Facultative cover can be proportional or non-proportional, and it is placed before the risk attaches.

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