Arizona Life and Health Practice Exam

When a ceding insurer transfers a portion of risk to an assuming insurer on a case-by-case basis, this process is referred to as?

1. Facultative reinsurance

2. Retrospective reinsurance

3. Proportional reinsurance

4. Excess of loss reinsurance

The correct answer is: Facultative reinsurance

Facultative reinsurance is the process where a ceding insurer transfers a specific portion of risk to an assuming insurer for individual policies or cases on an as-needed basis. This type of reinsurance is particularly beneficial for the ceding insurer when assessing risks that may not fit into the standard reinsurance treaty. In facultative reinsurance, each case is evaluated separately, allowing the reinsurer to accept or decline the coverage based on the unique characteristics of the risk presented. This contrasts with other forms of reinsurance, such as treaty reinsurance, where entire categories of risks are agreed upon through a contractual arrangement without case-by-case evaluation. Understanding this process is crucial because it exemplifies how ceding insurers can manage their risk exposure effectively by selectively transferring risks while retaining the ability to assess each case individually. This flexibility makes facultative reinsurance a valuable tool in the risk management strategies of insurance companies.