Facultative reinsurance

Facultative reinsurance, fac in market shorthand, places one risk at a time. The cedant sends a submission (insured value, loss history, engineering survey, wording), and the reinsurer is free to accept or decline it, hence the name. An obligatory treaty works the other way, since the reinsurer must take every risk that falls within the agreed scope; facultative vs treaty reinsurance comes down to a case-by-case choice against an advance commitment to a whole book, and the entry on facultative and treaty reinsurance covers that comparison in full. In between, a facultative obligatory treaty (fac/oblig) lets the cedant pick what it cedes while the reinsurer has to follow. Three kinds of risk go fac. Those that exceed treaty capacity, those the treaty excludes or that fall outside its appetite, and those where the cedant wants a second opinion on price. Fac can be proportional, with the reinsurer taking a percentage of the sum insured and of the original premium, less a ceding commission, or non-proportional (fac XL), where it covers a layer above a retention for a separately priced premium. Facultative underwriting is therefore risk-by-risk work, often with an engineer's site visit on large industrial plants. Placement happens in London (Lloyd's and the company market), on continental markets or through specialist brokers, and each placement produces a slip, the document that records the terms each reinsurer has accepted. In London it takes the MRC (Market Reform Contract) format, while US reinsurers usually issue a facultative certificate. Fac has two drawbacks. Placement takes time, and the reinsurer only sees what the cedant chooses to show it, which raises the fear of being offered mostly the weaker risks. This entry sticks to fac and how it is placed, while the entry on facultative and treaty reinsurance sets fac beside the treaty within a ceded program.