Differentiating facultative and treaty reinsurance, which statement is correct?

• A. Facultative reinsurance covers a portfolio under a standing agreement; treaty covers individual risks.
• B. Facultative reinsurance covers individual risks; treaty covers portfolio under standing contract.
• C. Both cover only large commercial risks; none cover personal lines.
• D. Facultative is mandatory; treaty is optional.

Answer: (B)

The main idea is the way the risk is paired with the reinsurer: facultative reinsurance is arranged for each individual risk, with the ceding insurer submitting a single risk and the reinsurer deciding whether to accept it, without any automatic coverage of other risks. Treaty reinsurance, on the other hand, is a standing agreement that covers a defined portfolio of risks over a period, so once the treaty is in place the reinsurer automatically reinsures a portion of all risks that fall under the agreed terms. That’s why the correct statement is that facultative covers individual risks and treaty covers a portfolio under a standing contract. The other options mix up the roles or imply conditions (like mandatory participation or only large commercial risks) that aren’t accurate in general practice, since reinsurance can apply to various lines and is typically optional.