Mode of reinsurance negotiated risk by risk, where the reinsurer accepts or declines each risk individually, used for exposures outside the obligatory treaty's appetite.
Facultative reinsurance, commonly called fac, is a placement mode in which each risk is submitted individually to the reinsurance market: the cedant presents the risk, the reinsurer examines it and freely decides to accept or decline it, hence its name. It contrasts with obligatory treaty reinsurance, in which the reinsurer is contractually bound to accept all risks falling within the defined scope. Facultative cover is used for three types of situation: high-value risks exceeding the capacity of the existing treaty, atypical or off-appetite risks whose profile does not match the treaty's criteria, and risks for which the cedant wishes to obtain independent validation of its own pricing. Fac placement can be done on the London market (LAS, Lloyd's and companies), on continental markets, or through specialized intermediaries. Each fac placement gives rise to the drafting of a slip, a condensed underwriting document that formalizes the terms accepted by each co-reinsurer. Fac has the disadvantage of sometimes lengthy placement timelines and some exposure to adverse selection, as the reinsurer only sees the risks the cedant chooses to present, which may lead it to fear being approached mainly for the poorer risks.
An insurance company accepts a pharmaceutical plant with an insured value of 800 million euros. Its fire treaty only covers risks up to 150 million. It places the remaining 650 million in facultative reinsurance on the London market, presenting the slip to around ten reinsurers, each of whom subscribes a share of the capacity.
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