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2/4 M97/February 2018 Reinsurance

• Where the original risk is hazardous. Certain risks are hazardous and, especially in local markets, the
insurer may not have the experience of the potential of these risks. A reinsurer could have a more
global perspective and experience from other markets which might help in the rating and
2 consideration of the risk. For example, a property insurer in Senegal might only have one fireworks
Chapter also reinsures firework factories in Europe and the rest of Africa and could offer them expertise as to
factory as a risk but by seeking facultative reinsurance, they might be contacted by a reinsurer that
rating and what sort of warranties might be applicable.
• Where there are unique commercial, financial or strategic reasons. These considerations vary
between insurers and geographical locations but there might be pressure on insurers to accept
business either for commercial or political reasons that they might otherwise not have considered due
to nature or size.
• Where the insurer is new to a particular market segment, the reinsurer may not offer a treaty facility
until it is confident that the insurer’s underwriters are competent in the disciplines concerned.
• Where there are elements within the account to be reinsured that have a greater level of risk than the
remaining lines. A facultative carve-out may be appropriate as the overall cost of purchasing
reinsurance would be less than if a rate applicable to the most hazardous elements of risk was
applied to the entire account. We refer to this again in chapter 4, section A1B.
• Where the cost of facultative reinsurance is less than the retail price. Alternatives to facultative
reinsurance would be less costly than involving treaty reinsurers and the insurer is effectively ‘fronting’
the risk on behalf of the facultative reinsurer.
Be aware
The entire local market might support a large or complicated risk as it is in the national interest, e.g. a dam. However,
they might not want to put this through to their treaty reinsurance because if a loss did occur, it would affect the
rates for the country’s entire insurance industry, so affecting their market development. They would perhaps want
this to be reinsured facultatively.

A1B Advantages of facultative reinsurance
• Risks are considered individually. Reinsurers can negotiate a suitable premium for the actual risk Reference copy for CII Face to Face Training
concerned rather than having to consider it as part of an overall portfolio of risks.
Consider this…
Why do you think this is an advantage to the reinsurer?

• Facultative insurance increases the insurer’s competitive edge within its chosen market.
• There is a freedom for the insurer to offer any risk which may then be accepted or declined by the
reinsurer. The individual examination of the risk with the option to accept or decline allows the
reinsurer to select a portfolio of risks which corresponds to their underwriting policy.
• The exposures to an insurer’s treaty reinsurance could be protected by facultative reinsurance of
particular risks to ensure a better overall result and lower reinsurance cost in the long-term.
• An insurer might benefit from the specific knowledge of the facultative reinsurer with regard to the
Insurer might benefit
from the specific nature and potential of the risk.
knowledge of the
facultative reinsurer • There is an opportunity for both parties to develop a successful and mutually-beneficial relationship.
The reinsurer can begin to understand the insurer’s underwriting methods and abilities and the insurer
to consider what areas that they could develop with the aid of reinsurance.
• A successful facultative relationship with a reinsurer might be a precursor to the insurer offering it a
place on its schedule of treaty reinsurers.
A1C Disadvantages of facultative reinsurance

• As risks are considered individually, the insurer cannot be certain of the placement of the facultative
reinsurance and this could affect its ability to underwrite the underlying risk.
• The administration involved is labour-intensive and expensive, so if many similar risks are to be
reinsured, it can be more cost-effective for the insurer to arrange automatic treaty protections.
• Delay in issuing a policy can create problems with clients and affect the insurer’s chances of securing
their participation on the original risk. For example, a reinsurer might insist on a survey and certain
recommendations from the survey being carried out before it commits to cover.