Facultative Reinsurance

Facultative reinsurance is used for risks that are unusually large, complex or outside the scope of an insurer's treaty reinsurance. Each risk is negotiated separately, and the reinsurer is free to accept or decline.

For example, an insurer asked to cover a large chemical plant, a skyscraper or a major infrastructure project might seek facultative reinsurance to share the risk, because a single loss could be too large for it to bear alone or may exceed its treaty limits.

Facultative reinsurance gives insurers flexibility to write large or unusual risks and to protect their treaty arrangements from exposure to exceptional risks.

It is more expensive and time-consuming to arrange than treaty reinsurance, because each risk must be underwritten individually, with documents, inspections and negotiations. It can also be proportional, sharing premiums and losses, or non-proportional, covering losses above a set level. Insurers typically use a combination of treaty and facultative reinsurance.