Casualty Actuarial Society (CAS) Practice Exam

Facultative reinsurance is a type of reinsurance transaction where specific individual risks are submitted to the reinsurer for consideration, rather than on a portfolio basis. This arrangement is typically employed when an underwriter is dealing with a large single risk that exceeds the company's limits or represents an unusually high exposure. By obtaining facultative reinsurance, the underwriter can transfer part of this risk to a reinsurer, effectively managing the company’s overall risk exposure and financial stability.

When considering the context of the options presented, relying on facultative reinsurance to limit exposure on a large single risk directly aligns with its primary purpose. Insurers often face situations where specific policies can involve significant potential losses due to the nature of the risk being insured. By accessing facultative reinsurance for these particular policies, underwriters can ensure that their retention limits are not exceeded, thereby safeguarding their overall financial health.

Other options may not accurately reflect the typical use case for facultative reinsurance. For instance, while stabilizing company profits and reducing complexity in underwriting guidelines may involve various strategies and types of risk management, facultative reinsurance particularly excels in addressing the exposure associated with significant individual risks. Enhancing coverage for high-risk inspections could involve different approaches such as re-evaluating pricing