What distinguishes facultative reinsurance from treaty reinsurance?

Facultative reinsurance is characterized primarily by the fact that it allows the insurer to choose specific exposures to cede to a reinsurer. This means that for each risk or policy that the insurer wants reinsured, they must negotiate and agree upon the terms with the reinsurer on a case-by-case basis. This selective approach enables insurers to manage their risk more effectively by determining which individual risks warrant additional protection and which do not.

In contrast, treaty reinsurance covers an entire portfolio of risks automatically based on pre-established terms agreed upon by the parties. Under treaty reinsurance, the reinsurer agrees to accept a certain percentage of all policies written by the insurer within the scope of the treaty, often with little negotiation for each individual policy.

Therefore, the key distinction is the insurer's ability to selectively choose which risks to cede to a reinsurer under facultative reinsurance, rather than ceding a complete portfolio as seen with treaty arrangements. This flexibility is crucial for insurers looking to manage their risk exposure strategically.