Facultative and treaty reinsurance

Reinsurance is practiced in two broad, complementary modes. Facultative reinsurance is negotiated risk by risk, the reinsurer examining and accepting each risk presented to it individually, with the option to decline. It suits large, atypical risks or those exceeding the capacity of existing treaties, for example a very high-value factory or an unusual cyber risk, but it is cumbersome to manage, since each acceptance requires a dedicated analysis. Treaty reinsurance, or obligatory reinsurance, works conversely on an automatic basis, the reinsurer undertaking to cover, according to rules agreed in advance, all the risks of a defined portfolio, without case-by-case examination. It provides systematic protection and lightens administration, but obliges the reinsurer to accept en bloc risks it does not choose individually. The two modes coexist in a cedant's strategy, the treaty providing baseline protection for the bulk of the portfolio, and facultative cover supplementing it occasionally for exceptional exposures. In cyber, where some risks remain hard to standardize, facultative reinsurance retains an important role for large companies with singular profiles.

To cover the colossal cyber risk of a global technology group, whose profile fits no standard treaty, a cedant turns to facultative reinsurance, negotiating bespoke protection for that single risk.

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