What facultative reinsurance is

Facultative reinsurance is a form in which an insurance company cedes to a reinsurer an individual risk or a specific object, not the whole portfolio. Each placement is agreed individually: the cedent offers the risk, and the reinsurer studies the information and decides for itself whether to accept it, in what share and on what terms. Both parties have freedom of choice: the cedent is not obliged to offer the risk, and the reinsurer is not obliged to accept it. Hence the name — from the word "facultative", meaning optional.

When facultative is used

  • the sum insured on the object exceeds the insurer's retention and the capacity of its treaty programs;
  • the risk is excluded from obligatory treaties — by type of activity, territory or hazard class;
  • the object is atypical for the portfolio: a large production plant, unique equipment, a complex construction project;
  • the policyholder or a lender requires confirmed reinsurance protection with reliable partners;
  • the insurer is entering a segment that is new to it and wants to rely on the reinsurer's expertise.

Facultative often complements a treaty program: what does not fit within the treaty limits is placed separately and closes the gap in protection.

How the mechanism works

The insurance company, together with the broker, prepares a slip — a document describing the risk, the terms of the original policy and the proposed reinsurance terms. The broker sends the offer to the market. The leading reinsurer (the leader) sets the price and terms, and the other participants join with shares until the required capacity is built up. After the shares are confirmed, a cover note and contract are issued, and the insurer issues the policy to the client.

Facultative cover can be proportional — the reinsurer receives a share of the premium and bears the same share of each loss — or non-proportional, when protection operates above an agreed priority on a specific risk (more in the non-proportional reinsurance section).

Advantages and limitations

The main advantages of facultative: the ability to accept a large or complex risk without breaching retention requirements; flexibility — terms are tailored to the specific object; access to the expertise of the reinsurer's underwriters and risk engineers; and protection of the balance sheet from concentration of liability on a single object.

The limitations are also significant. Each placement takes time and a full set of data, and the market's response time must be built into the sales schedule. The cost of protection per unit of risk is usually higher than in a treaty program. The reinsurer is entitled to decline or offer tougher terms. With a large flow of similar risks, the document-handling burden becomes excessive — in that case it is more sensible to move to treaty reinsurance.

Key placement terms

  • The reinsurer's share and the cedent's retention on the risk;
  • reinsurance commission — remuneration to the cedent for sourcing and servicing the risk in a proportional arrangement;
  • conformity with the original policy — the follow-the-fortunes principle, the list of exclusions and special clauses;
  • deductibles, limits and sublimits for individual risks and sections of cover;
  • settlement procedure — premium payment deadlines, currency, loss notification, and the reinsurer's participation in claims settlement;
  • period of cover, as a rule coinciding with the term of the original contract.

What data is needed for a quotation

The fuller the information, the faster and more accurate the market's response. The following is usually requested:

  • a description of the object, the activity and the main risks, and an inspection report or risk engineering assessment, if available;
  • the sums insured by object and the current insurance terms;
  • the desired placement share and the retention;
  • the territory, the insurance period and the loss history for the past several years.

How Polis Re helps

The Polis Re broker prepares the slip and the package of underwriting information, selects reinsurers on the domestic and international market taking into account requirements for their financial strength, negotiates price and terms, builds up the required capacity, checks the documents, monitors settlements and supports claims settlement. The meaning of terms can be checked in the glossary. To get a preliminary assessment, send a reinsurance request.