Facultative Reinsurance
Individual risk reinsurance negotiated on a case-by-case basis for specific policies that exceed the carrier's treaty capacity.
What It Is
Facultative reinsurance is reinsurance arranged on an individual risk basis, where the carrier submits a specific risk to one or more reinsurers for consideration, and each reinsurer has the faculty (option) to accept or decline the risk. Unlike treaty reinsurance, which automatically covers all qualifying risks, facultative reinsurance requires separate underwriting and negotiation for each submission.
Carriers use facultative reinsurance when a risk exceeds the capacity of their treaty program, when the risk falls outside treaty terms but the carrier still wants to write it, or when the risk requires specialized reinsurance expertise. Common scenarios include large property risks exceeding the per-risk treaty limit, unusual or complex risks that the treaty excludes, and risks in geographic concentrations where the carrier needs to manage aggregate exposure.
The facultative process adds time to the placement timeline, typically two to four weeks beyond the normal quoting process. The carrier must submit the risk to reinsurers, negotiate terms, and receive written confirmation before binding. This additional timeline is often invisible to the broker and insured, but it explains why quotes on large or complex risks take longer.
Why It Matters for Brokers
Brokers placing large or complex commercial accounts should understand that the carrier may need to arrange facultative reinsurance, which affects both the timeline and the pricing. Carriers add a margin to the reinsurance cost, so accounts requiring facultative placement are typically more expensive than those within treaty capacity. Understanding this helps brokers set expectations and plan timelines.
Real-World Example
A broker submits a $35M property risk to a carrier whose per-risk treaty limit is $15M. The carrier writes its $15M treaty share and places $20M in facultative reinsurance with two reinsurers ($10M each). The facultative process takes three weeks. The carrier's quote reflects the blended cost of its treaty-supported portion ($15M at 0.35% rate) and the facultative portion ($20M at 0.45% rate), producing a total premium of $142,500 rather than the $122,500 it would have been at the treaty rate alone.
Common Mistakes
- 1Not allowing adequate time for accounts that require facultative reinsurance, leading to missed effective dates or last-minute binding issues.
- 2Submitting to carriers without understanding their per-risk limits, resulting in unexpected delays when the carrier must arrange facultative support.
How brokerageaudit.com Handles This
brokerageaudit.com tracks carrier per-risk capacity by line, alerting brokers when a submission exceeds known treaty limits and additional time should be built into the placement timeline. The system notes when a carrier's quote is likely to include a facultative reinsurance component, helping brokers understand the pricing basis.