What is 'Facultative Reinsurance'

Facultative reinsurance is a type of reinsurance contract that covers a single risk. Facultative reinsurance is one of the two types of reinsurance contract transaction, with the other type being treaty reinsurance. Facultative reinsurance is considered to be more transaction-based than treaty reinsurance.

BREAKING DOWN 'Facultative Reinsurance'

Companies that enter into a reinsurance contract with a reinsurance company do so in order to pass off some of the risk that they face in exchange for a fee. In the case of an insurance company using a reinsurer, that fee may be a portion of the premium that the insurer receives for underwriting a policy. The company that cedes the risk to the insurer has the option of ceding a specific risk or a block of risks. Reinsurance contract types determine whether the reinsurer is able to accept or reject an individual risk, or if the reinsurer must accept all risks.

Facultative reinsurance allows the reinsurance company to review individual risks and determine whether to accept or reject the risk. How profitable the reinsurance company is in this type of contract arrangement depends on which of the risks the reinsurer decides to take on.

In a facultative reinsurance arrangement, the ceding company and the reinsurer create a facultative certificate that indicates that the reinsurer is accepting a specific risk.

Companies looking to cede risk to a reinsurer may find that facultative reinsurance contracts are more expensive than treaty reinsurance. This is because treaty reinsurance covers a “book” of risks, which is an indicator that the relationship between the ceding company and the reinsurer is expected to be more long-term than if the reinsurer only dealt with one-off transactions covering single risks. While the increased cost is a burden, a facultative reinsurance arrangement may allow the ceding company to reinsure a risk that it may otherwise not be able to do, given a block of risks.

RELATED TERMS
  1. Treaty Reinsurance

    A reinsurance contract in which a reinsurance company agrees ...
  2. Obligatory Reinsurance

    A reinsurance treaty in which the ceding insurer agrees to send ...
  3. Lead Reinsurer

    The reinsurer responsible for negotiating the terms and rates ...
  4. Shortfall Cover

    A reinsurance agreement used to temporarily reduce gaps in an ...
  5. Reinsurance Credit

    An accounting entry made by an insurer for premiums ceded to ...
  6. Following Reinsurer

    A reinsurance company that signs onto a reinsurance treaty, but ...
Related Articles
  1. Insurance

    When Things Go Awry, Insurers Get Reinsured

    Guru Warren Buffett is making this sector popular. Learn more here.
  2. Insurance

    Facultative vs. Treaty Reinsurance: Differences and Examples

    Reinsurance companies offer insurance to other insurers in case the traditional insurer does not have enough money to pay claims against its written policies.
  3. Insurance

    The Business Model of Reinsurance Companies

    Learn about the business of reinsurance, a hidden industry that underpins the entire financial and insurance structure around the globe.
  4. Insurance

    The Reinsurance Industry: An Inside Look

    Low demand and high regulatory pressures may be problematic for the global reinsurance market following the shrinking margins and declining demand of the first half of 2016.
  5. Tech

    The Reinsurance Industry: An Inside Look (BRK.A)

    Warren Buffett has a major influence on the global reinsurance market, which has seen momentum in 2016 for higher revenue.
  6. Investing

    5 Reinsurance Stocks To Watch

    Due to the decline in the reinsurance sector, many stocks within the sector are now trading at historic lows relative to book value. For investors, the time may be right to pounce on the values. ...
  7. Insurance

    Third Point Reinsurance Notes Largest Profit in Years

    Third Point Reinsurance saw a tripling of net income in the second quarter of 2016 over last year.
  8. Insurance

    How Does Reinsurance Work?

    Reinsurance is a practice in which insurers transfer portions of portfolios to other parties in order to reduce their exposure to claims.
  9. Insurance

    Insurance, Excess Insurance and Reinsurance: What's the Difference? (ALL)

    Understanding the differences might help you avoid being overinsured or underinsured.
  10. Taxes

    2 Ways Hedge Funds Avoid Paying Taxes

    Learn about two strategies hedge funds use to minimize their tax liabilities. Read why some hedge funds are in the reinsurance business in Bermuda.
RELATED FAQS
  1. Why do some companies in the insurance sector engage in reinsurance?

    Discover how some companies in the insurance sector engage in reinsurance. Reinsurance allows insurance companies to transfer ... Read Answer >>
  2. What is Warren Buffett's relation to "Supercat" insurance?

    Understand the concept of catastrophe reinsurance and learn how Berkshire Hathaway makes billions providing such insurance ... Read Answer >>
  3. What financial ratios are most useful for an investor to evaluate the liquidity of ...

    Learn which financial ratios are most useful for investors in financial analysis to evaluate the liquidity of an insurance ... Read Answer >>
  4. What are the main factors that impact share prices in the insurance sector?

    Learn about some of the main factors that impact share prices in the insurance sector. Insurance companies make money by ... Read Answer >>
  5. What risks do I face when investing in the insurance sector?

    Read about the unique challenges faced by insurers, and learn how those challenges manifest themselves as risks for equity ... Read Answer >>
Hot Definitions
  1. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
  2. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  3. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  4. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  5. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
Trading Center