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3/2 M97/February 2018 Reinsurance

Introduction

In chapter 2 we saw that facultative reinsurance relates to a specific individual risk, which the insurer
can choose to offer to the reinsurer, who in turn is then free to accept it, or not. In this chapter we will
look at the characteristics of facultative reinsurance in both its proportional and non-proportional forms.

Key terms
This chapter features explanations of the following terms and concepts:

3 As original Claims recoveries Common account Compartmentalisation
Chapter Consideration Deductible Estimated maximum Excess of loss
loss (EML)
Facultative non-proportional Facultative obligatory
Exposure
reinsurance
reinsurance reinsurance Facultative proportional
Original risk Premium Retained share Retention

A Main features and operation of different types of

facultative reinsurance

Since facultative placements, especially those made on a proportional basis, often follow the terms,
Important to establish
exactly the coverage conditions and exclusions of the original insurance policy, it is important to establish exactly the
under both policies coverage under both the facultative reinsurance policy and the original insurance policy.
The term ‘as original’ under a facultative placement could cover all aspects of the original policy,
including any claims settlements that follow any original settlements made by the original insurance
company. Such settlements might not strictly be within the intention of the original insurance coverage
and the corresponding facultative contract, so disputes could arise. The term ‘as original’ remains a
contentious and problematic area so it makes sense for facultative underwriters to identify the terms, Reference copy for CII Face to Face Training
conditions, exclusions and warranties applying to the original policy at the time of acceptance. The
consequences and remedies for breach of such terms would also need to be established. It is, therefore,
implicit that the main objective of placing facultative reinsurance is to cover what is covered by the
original insurance so there should be no gaps in cover. The expression ‘back to back’ conveniently
captures the intention of the placement in this respect.
Activity
‘Facultative’ is a key word in this part of your study text. Be sure that you know its meaning in a reinsurance context.
Try searching online for a definition if it is not in your usual reference dictionary.

A1 Facultative proportional reinsurance
Facultative proportional reinsurance permits the insurer to pass on a fixed or quota share of the liability
it has accepted on a particular risk by ceding a share to one or more reinsurers. It is important to
remember that the ceding insurer pays a share of the premium less commission to the reinsurer and in
return recovers the same share, or proportion, of the original claim from the reinsurer in the event of a
loss. The effect of this is that the insurer, otherwise known as the reinsured, cedant or ceding company
is limiting its exposure to its retained share.

A2 Facultative obligatory reinsurance

Facultative obligatory reinsurance combines some of the features of both facultative and treaty methods
of reinsurance. An obligation is placed upon the reinsurer to accept a cession once the insurer has
decided to cede a risk. The insurer is, however, free to choose whether or not to cede. Facultative
obligatory reinsurance is covered in more detail in chapter 4, section A4.