In proportional reinsurance, it is the reinsurance of part or all of the insurance provided by a single policy, with separate negotiation for each policy cession of insurance - for sharing liability, premium, and loss.

In excess of loss reinsurance, it is the reinsurance of each policy, with separate negotiation for each - for indemnity of loss in excess of the reinsured's loss retention.

The word "facultative" connotes that both the primary insurer and the reinsurer usually have the "faculty" or option of accepting or rejecting the individual submission (as distinguished from the obligation to cede and accept, to which the parties agree in most treaty reinsurance).