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Simple English definitions for legal terms
facultative reinsurance
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A quick definition of facultative reinsurance:
Facultative reinsurance is when one insurance company transfers all or part of their risk to another insurance company in exchange for a percentage of the original premium. This helps the first insurance company to take on more risk and can also provide financial stability in case of unexpected losses. The second insurance company only assumes liability for the specific risk that they agree to cover.
A more thorough explanation:
Facultative reinsurance is a type of reinsurance where one insurer transfers all or part of their risk to another insurer in exchange for a percentage of the original premium. This type of reinsurance is optional for the reinsurer, meaning they have the "faculty" to accept or reject the risk.
For example, if an insurance company has a policy with a high risk of loss, they may choose to transfer some of that risk to a reinsurer through facultative reinsurance. The reinsurer can then choose to accept or reject the risk based on their own assessment of the situation.
Facultative reinsurance is different from treaty reinsurance, which covers all risks in a given class as soon as they are insured by the direct insurer. It is also different from excess reinsurance, which only covers amounts of insurance that exceed a specified sum.