Insurance Broker Certification Practice Exam

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What type of reinsurance involves underwriting each application separately?

Automatic reinsurance
Facultative reinsurance
Agency reinsurance
Contractual reinsurance

The correct answer is: Facultative reinsurance

Facultative reinsurance is characterized by the process of underwriting each application individually. This type allows the ceding insurance company to seek reinsurance for specific risk exposures that it wants to cover. The reinsurer then evaluates these individual applications on a case-by-case basis, assessing the risks and deciding whether to accept the reinsurance or not. This stands in contrast to automatic reinsurance, where pre-established agreements allow the reinsurer to accept a blanket coverage for a defined class of business without individually assessing each risk. The other options listed, such as agency reinsurance and contractual reinsurance, do not specifically refer to the individualized assessment of risks that defines facultative reinsurance. By understanding these distinctions, it's clear how facultative reinsurance serves as a targeted approach to managing specific risks within the broader insurance framework.