Definition
Facultative Reinsurance
Facultative reinsurance is the case-by-case reinsurance of a single, often large or unusual, risk that falls outside or above the insurer's treaty arrangements.
Unlike a treaty, facultative cover is negotiated individually, with the reinsurer free to accept or decline each offered risk on its own merits. It is used for very large exposures, such as a major industrial plant or an exceptionally high life sum assured, that exceed treaty limits.
Facultative reinsurance gives flexibility and tailored terms but involves more underwriting effort and time per risk. Insurers typically use it to supplement treaties for peak or atypical risks that the standard treaty would not adequately cover.
Related terms
- ReinsuranceReinsurance is insurance for insurers, where a reinsurer assumes part of the risk an insurer has underwritten in exchange for a share of the premium.
- Treaty ReinsuranceTreaty reinsurance is an arrangement where the reinsurer automatically accepts a defined share of all risks within an agreed class written by the insurer.
- RetentionRetention is the portion of a risk an insurer keeps on its own books rather than ceding to reinsurers.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.