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Chapter 7 Contract wordings 7/5

A1 Facultative wordings
A facultative wording must specify:
• the parties to the reinsurance contract;
• the subject matter of the reinsurance contract (that is, the original insurance wording); and
• the terms, conditions, limitations and exclusions of the reinsurance contract.

Be aware
To be clear, the reinsurance contract is an entirely separate and distinct contract from the underlying insurance
contract. The reinsurance relationship that results from the reinsurance contract is mutually exclusive from the
relationship between the reinsured and the insured. The liabilities and obligations of the reinsured and reinsurer are
governed by the reinsurance contract, not the insurance contract.

Therefore, it is important to distinguish between the terms, conditions etc. of the original insurance
contract and those of the reinsurance, and the following standard clauses are often used for this
purpose. In this regard, you should be aware that the underwriter may or may not have an opportunity to
review the original insurance wording (which is typically referenced ‘as original’ in the facultative
wording).

A1A Proportional facultative reinsurance

Here, the facultative reinsurer agrees to accept a specified proportion or share of the original risk. In
Specified proportion
quota share reinsurance, this share will usually be expressed as a percentage of the original limit. In or share of the
return, the reinsurer receives the same percentage of the original premium, unless otherwise stated. original risk
An example of a proportional facultative reinsurance clause follows:

In consideration of the premium charged, and subject to the terms and conditions of this Contract as set
out in the slip and its attachments and/or endorsements applicable thereto, this Contract reinsures the
Reinsured’s interest in payments made within the terms and conditions of the Original Policy

Unless otherwise stated in this Contract the Reinsured: Reference copy for CII Face to Face Training
a. shall retain during the period of this Contract at least the retention(s), subject to any proportional and/
or excess of loss treaty reinsurance, on the identical subject matter and perils and in identically the
same proportion(s) as stated in the Contract. In the event of the retention(s) and/or proportion(s)
being less, the Reinsurers’ liability will be correspondingly proportionately reduced.
b. warrants that the premium paid to the Reinsurer(s) for this Contract is calculated at the same gross Chapter
rate as the Original Policy for the identical subject matter and perils and in the proportions reinsured, 7
less only those deductions stated.
In the event of inconsistencies between the Original Policy and this Contract, this Contract shall prevail.

If the Reinsured shall make a claim knowing the same to be false or fraudulent as regards amount or
otherwise, this Contract shall become void and all claims hereunder shall be forfeited.

A1B Non-proportional facultative reinsurance
The most common form of non-proportional facultative reinsurance is excess of loss reinsurance. The
reinsurers agree to accept a specified proportion or share of the premium in return for paying that same
share of the amount by which any loss exceeds the retention up to the limit of cover.

An example of the operative part of a standard non-proportional facultative reinsurance clause is as follows:
In consideration of the premium charged, and subject to the terms and conditions of this Contract as set
out in the slip and its attachments and/or endorsements applicable thereto, this Contract reinsures the
Reinsured’s interest in those payments made within the terms and conditions of the Original Policy
exceeding the Excess amount as set out in the slip up to the Limit amount as set out in the slip.

The wording must specify the amount and currency of the retention – that is, the amount retained by the Refer to section D3
for the UNL clause
reinsured – and of the limit of cover (or indemnity). What comprises the amount is usually defined in the
ultimate net loss (UNL) clause. At its simplest, the UNL is the sum actually paid by the reinsured in
settlement of a claim.