Facultative obligatory treaty (fac-oblig)

Facultative reinsurance is negotiated risk by risk: the cedant offers, the reinsurer accepts or declines. A treaty is automatic: all risks in a class are ceded and accepted. The facultative obligatory treaty combines the two, asymmetrically. The cedant remains free to cede each risk or not, as in facultative, but the reinsurer commits to accept, within the limits and on the terms set in the contract, every risk offered to it, as under a treaty. The mechanism is useful to top up a treaty's capacity without negotiating each placement, for large risks or for lines where business arrives irregularly. It carries an obvious adverse selection risk: the cedant can keep the best risks and cede the more doubtful ones, without the reinsurer being able to refuse. Hence the market's wariness, higher prices, and the usual safeguards: an obligation to cede according to a consistent rule, a minimum share retained by the cedant, the reinsurer's right to information and audit, and quick termination. The fac-oblig illustrates a general rule of reinsurance: the more the cedant chooses, the more the reinsurer must trust, and the more it charges for that trust.