CII London Market (LM2) – Insurance Principles and Practices Practice Test 2025 - Free Insurance Exam Practice Questions and Study Guide

The type of reinsurance that is typically used for individual risks is facultative reinsurance. This form of reinsurance is arranged on a case-by-case basis, meaning that it is specifically tailored for individual risks that the ceding insurer wishes to transfer.

Facultative reinsurance allows the reinsurer to evaluate each risk individually and decide whether to accept or decline the risk, based on specific underwriting criteria and terms. This flexibility makes it an ideal choice for unique or atypical risks, such as high-value properties or specialized business operations that may not fit into a standard reinsurance treaty.

In contrast, proportional treaties and quota share arrangements involve sharing a percentage of risks defined by a broader agreement, which may not provide the individual assessment needed for specific risks. Excess of loss reinsurance, on the other hand, is generally used to cover losses that exceed a certain amount, rather than focusing on individual risk placement. Thus, facultative reinsurance stands out as the best fit for individual risk transactions.