Can you explain the difference between facultative and treaty reinsurance?

Your Answer

How To Answer This Question?

This question is fundamental for a Reinsurance Analyst role, as it tests your knowledge of the two primary types of reinsurance agreements.

Facultative Reinsurance is a type of reinsurance where each risk is individually underwritten by the reinsurer. This means that the reinsurer has the option to accept or reject each risk presented by the ceding company.

Treaty Reinsurance, on the other hand, involves a reinsurance agreement that covers a portfolio of risks. The reinsurer agrees to accept all risks within a defined category, without the need for individual underwriting.

When answering, start by defining each type clearly. Then, highlight the key differences, such as the level of underwriting involved and the scope of coverage. You can also mention the scenarios in which each type is typically used. For example, facultative reinsurance is often used for high-value or unusual risks, while treaty reinsurance is more common for standard, homogeneous risks.

Example Answer: "Facultative reinsurance is a type of reinsurance where the reinsurer evaluates and decides on each individual risk presented by the ceding company. This allows for tailored coverage but can be time-consuming. Treaty reinsurance, in contrast, involves a pre-negotiated agreement that covers a whole portfolio of risks, providing broader and more automatic coverage. Facultative reinsurance is typically used for unique or high-value risks, whereas treaty reinsurance is used for more standard, homogeneous risks."