AD Banker Comprehensive Practice Exam

What type of reinsurance agreement allows the reinsurer the opportunity to reject coverage for individual risks?

1. Treaty

2. Facultative

3. Reciprocal

4. Residual

The correct answer is: Facultative

The correct answer is facultative reinsurance. This type of reinsurance agreement is characterized by the reinsurer having the option to accept or reject coverage for individual risks as they arise. In facultative reinsurance, the primary insurer can present specific risks to the reinsurer, who then evaluates those risks and decides whether or not to provide coverage for them. This allows the reinsurer to selectively choose which risks to accept, based on their underwriting criteria and risk appetite. In contrast, treaty reinsurance involves a pre-agreed set of terms between the parties that typically covers a large category of risks, with the reinsurer automatically accepting submissions that fall within the agreed parameters, without evaluating each individual risk. Reciprocal reinsurance involves arrangements where insurance companies mutually cover each other’s risks and is generally not focused on the selection of individual risks. Residual reinsurance refers to coverage for residual risks that are not covered by other forms, which does not specifically address the selective acceptance of individual risks.