CAS Practice Exam 2025 – Complete Study Guide

Facultative reinsurance involves the reinsurance of individual risks or exposures, as opposed to treaty reinsurance, which covers a whole block of business. This type of reinsurance generally incurs higher costs because it necessitates extensive information about each specific loss exposure being considered for coverage. The reinsurer needs to thoroughly evaluate risks on a case-by-case basis, which often requires detailed underwriting assessments and analyses.

Every individual risk presented for facultative reinsurance must be underwritten separately, leading to increased administrative time, effort, and expertise from the reinsurer. This process not only involves gathering comprehensive data on the nature of the exposure and the potential loss it might incur, but also requires actuaries and underwriters to assess that information to determine appropriate pricing and terms. The depth of analysis required for each risk contributes significantly to the higher costs associated with facultative reinsurance compared to treaty arrangements, which involve standardized terms and automatic coverage for predefined categories of business.

The other options inherently miss the mark in capturing the fundamental reason for higher costs. While it is true that the administrative burden can be extensive, it is actually the depth of information and assessment required for individual exposures that primarily drives up costs. In facultative reinsurance, the primary insurer does provide comprehensive details, as