CAS Practice Exam 2026 – Complete Study Guide

The primary function of facultative reinsurance is to provide insurers with a solution for specific risks that may exceed their underwriting capacity or represent a higher level of exposure, particularly in certain geographic areas. This form of reinsurance allows insurers to cede individual risks to reinsurers on a case-by-case basis, which can help them manage their overall portfolio risk more effectively.

By leveraging facultative reinsurance, insurance companies can enhance their large-line capacity, meaning they can underwrite larger policies without exposing themselves excessively to significant losses. This is particularly beneficial in situations where the underlying risk is concentrated in certain locations known for higher loss potential, as it enables the insurer to reduce its exposure while still participating in those markets.

Other options do not accurately represent the core functions of facultative reinsurance. For example, providing unlimited coverage at no cost is not realistic, as reinsurance involves costs. Similarly, while facultative reinsurance offers flexibility, it does not cover all types of loss exposures without restrictions, nor does it ensure automatic approval of all exposures. Each risk is carefully evaluated before reinsurance is agreed upon. Thus, the correct choice accurately captures the essence of how facultative reinsurance operates in the insurance landscape.