Facultative Reinsurance

Facultative reinsurance is reinsurance arranged one risk at a time. The word 'facultative' means the reinsurer has the faculty — the option — to accept or reject each individual policy offered to it. This contrasts with treaty coverage, where the reinsurer must automatically take every risk that falls within the agreement. Because each submission is underwritten on its own merits, facultative deals are used for large, unusual, or high-hazard exposures that fall outside the primary carrier's normal treaty terms.

For a small-business buyer, facultative reinsurance is usually invisible, but it explains why an insurer can sometimes say 'yes' to a risk that looks too big or too odd for its standard appetite — a landmark building, an unusual manufacturing operation, or a very high per-occurrence limit. The primary carrier shops that single account to a reinsurer, secures backing, and issues the policy. The tradeoff is time and cost: facultative placement is labor-intensive, so it can slow down binding and add expense that may show up in the quoted premium.

A practical nuance is how facultative fits alongside a carrier's treaty reinsurance. Insurers often use treaties for the bulk of routine business and reserve facultative for the exceptions that spill over treaty limits or violate treaty exclusions. Facultative can be written proportionally (sharing premium and loss by percentage, sometimes with a ceding commission) or on an excess-of-loss basis above an attachment point. Because it is negotiated deal by deal, terms and pricing vary widely, making it the most flexible — but also the least efficient — form of reinsurance.