Louisiana Title Insurance Exam 2025 – 400 Free Practice Questions to Pass the Exam

The correct answer is facultative reinsurance. This practice involves one insurance company, known as the ceding company, transferring a portion of the risk from a specific insurance policy to another insurer, often referred to as the reinsurer. This transfer allows the ceding company to manage its risk exposure by sharing potential losses, helping to ensure greater financial stability and capacity to underwrite more policies.

Facultative reinsurance is specifically used on a case-by-case basis, meaning that the reinsurer assesses each risk individually and decides whether or not to accept it. This is distinct from treaty reinsurance, where a blanket agreement exists between the two parties covering all policies within certain parameters.

Understanding this concept is crucial for those working in the insurance field, as it helps mitigate risk and maintain solvency. Other choices do not accurately describe this specific type of risk-sharing arrangement. For instance, reinsurance generally refers to all forms of insurance risk transfer from one company to another, while co-insurance relates to shared coverage within a policy rather than transferring risk between insurers. Underwriting involves evaluating risk for insurance applications but does not pertain to the act of sharing risk after a policy is written.