Facultative Reinsurance: Meaning, Features and Examples

Have you ever wondered what could happen if your insurance company fails? The answer to this question is understanding the concept of reinsurance. Understanding how reinsurance works can give you peace of mind. The scope of this article is to provide a brief understanding of the following:

• What is Reinsurance
• What is Facultative Reinsurance
• Facultative Reinsurance Example
• Treaty vs Facultative Reinsurance

What is Reinsurance?

There could be times where an insurance company will not be in a position to service all its claims. What can an insurance company do in such a scenario? It will enter into a reinsurance contract with a reinsurance company. The reinsurance company will take over the risk burden of the insurance company for a premium. Thus if the insurance company fails to honor the claim due to the unavailability of funds, the reinsurance company will step in and honor the claim.

What is Facultative Reinsurance?

Facultative reinsurance is when an insurance company comes into an ad-hoc reinsurance contract with a reinsurance company. It is a specialized contract with special specific terms and conditions unique to a particular project/venture.
An insurance company can come into a facultative reinsurance contract with a reinsurance company if It wants to cover something which is not covered in its regular treaty reinsurance contract.

Facultative Reinsurance Example

Suppose an insurance company wants to cover a new specialized real estate project that is not part of its treaty reinsurance contract. How will the insurer insure this new project? The answer is the insurance company will enter into a facultative reinsurance contract with a reinsurer that covers risks associated only with this project. The treaty reinsurance contract will cover the other

Treaty vs Facultative Reinsurance

A treaty reinsurance contract is a blanket reinsurance treaty that agrees to cover all of the insurance company’s risk. A treaty reinsurance contract can cover all of the risks on the books of the insurance company or risks associated with a particular sector. For instance, there could be a treaty reinsurance contract that covers all of the marine insurance-related risks of an insurance company.
Facultative reinsurance is where an insurance company is inclined to cover a specific project that is not covered under its blanker reinsurance treaty.