Facultative and treaty reinsurance

A facultative certificate carries one risk: one insured, one site or program, one period, one accepted share. A quota share or surplus treaty carries every policy in a line written during the underwriting year, and the reinsurer never sees them one by one. That is the whole difference between facultative and treaty. Fac is placed risk by risk; the cedant submits the risk, and the reinsurer underwrites it, then quotes terms or declines. It is used for risks that exceed treaty capacity or fall outside the treaty wording, and for odd profiles such as a very high-value plant or an unusual large cyber account. It is expensive to run, since every acceptance is its own piece of underwriting. Treaty reinsurance, also called obligatory, works the other way around. The reinsurer commits in advance, on agreed terms, to a whole defined portfolio, on a proportional basis (quota share, surplus) or a non-proportional one (per risk or per event excess of loss), and the cedant cedes every risk that falls within scope. Treaties usually renew once a year, often on January 1. Protection is automatic and the paperwork is light, but the reinsurer takes on a block of risks it did not pick. In between sits facultative obligatory reinsurance, or fac/oblig, where the cedant chooses what to cede and the reinsurer must accept, which leaves it open to adverse selection. In a program, the treaty carries the bulk of the book and fac tops it up on exceptional exposures. In cyber, where large accounts resist standardization, fac still has a job. This entry sets the two modes against each other; the mechanics of fac itself, proportional fac or fac XL, slip, MRC and facultative certificate, are in the entry on facultative reinsurance (fac).