WHAT IS FACULTATIVE REINSURANCE

The facultative reinsurance” implies optional action.The ceding company under the facultative reinsurance has a free power in its choice of business to be offered. The direct underwriter is therefore under no duty to make an offer and the reinsurer is also under no duty to accept the risk ceded. The reinsurer can accept or decline and the cedant can offer or retain as each may consider favorable under the circumstances.

In this method of reinsurance, each risk to be reinsured is dealt with individually and the same underwriting considerations are used by the reinsurer in his assessment of the risk as had been used by the direct insurer. The offer normally takes the form of a slip containing full details of the risk offered for reinsurance. The reinsurer to whom the risk is offered signs the reinsurance slip indicating his acceptance.

Having accepted a risk, an insurer may decide to pass some of it to another risk carrier. To do this, the insurer will approach reinsurers either directly or via a reinsurance broker. All the relevant information concerning the risk will need to be presented to the proposed reinsurance.

ADVANTAGES OF FACULTATIVE REINSURANCE

• To reinsure hazardous risks excluded from the treaty
• Individual examination of the risk with the option to accept or decline. 
• The possibility of exercising a certain amount of influence on the cedant’s underwriting by asking him to improve the risk offered or advising him of covers which have shown loss elsewhere.
• The possibility of obtaining adequate premium rate, either by requesting an increase in the rate offered, by reducing reinsurance commission or by indicating a risk premium (premium net of costs).
• To reduce the liability to treaty reinsurance on certain risks by protecting the treaty from adverse underwriting results.
• A more advantageous way of determining the commitment per risk and on accumulations.
• To provide extra knowledge of the cedants’ underwriting and selection methods
• Enables small companies with limited capital and expertise to write large risks beyond their capacity
• Protects the cedant’s other treaties from adverse underwriting results
• Increases the insurer’s competitive edge within its chosen markets
• Enables the spread of risk over a wider number of Underwriters and geographical scope
• Losses are settled immediately. No need for quarterly statements