What is Facultative Reinsurance?
Facultative reinsurance is a coverage purchased by a primary insurer, also known as the ceding company or cedent to cover a single risk held in the primary insurer's book of business. Facultative reinsurance contracts cover individual underlying policies, and they are written on a policy-specific basis. Reinsurance gives the insurer more security for its equity and solvency (and more stability when unusual or major events occur). Insurance companies looking to cede risk to a reinsurer may find a facultative reinsurance arrangement may allow the ceding company to reinsure specific risks that it may otherwise not be able to take on.
How does Facultative Reinsurance work?
In a facultative reinsurance arrangement, the ceding company, or reinsurance broker, creates an underwriting slip that outlines the terms and conditions that the reinsurer is being asked to accept on an individual risk. The reinsurance company will review the underwriting slip along with any supporting submission documents and determine whether to accept, reject or propose changes to the terms and conditions for each individual contract. The insurance company has the option of either retaining a portion of the risk or ceding it entirely to the reinsurance market. The insurer can access the reinsurance market either directly or through a reinsurance broker.