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. Obligatory Reinsurance

    A reinsurance treaty in which the ceding insurer agrees to send ...
  2. Reinsurance Credit

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

    A reinsurance company that signs onto a reinsurance treaty, but ...
  4. Spot Reinsurance

    A reinsurance agreement that covers a single peril.
  5. Extraction Factor

    The portion of an insurance company’s subject premium that is ...
  6. Commutation Agreement

    A reinsurance agreement in which the reinsurer and ceding company ...
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. 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. ...
  4. 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.
  5. 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.
  6. Trading

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  7. Financial Advisor

    Berkshire Hathaway's 4 Most Profitable Lines of Business (BRK-A, BRK-B)

    Learn about Warren Buffett and his company Berkshire Hathaway. Understand why the four companies listed are his most important and profitable lines of business.
  8. Investing

    Event-Linked Bonds: Competing Against A Catastrophe

    These debt instruments can blow new wind into your portfolio, but only if you can handle the risk.
  9. Personal Finance

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What is the Financial Services Sector?

    A diverse group of companies, beyond banks and credit unions, comprises the financial services sector. Read Answer >>
  4. What demographic trends are creating potential profits for insurance companies?

    Discover the ways in which insurance companies can profit from demographic trends. Two major ones are aging populations and ... Read Answer >>
  5. What are the primary sources of market risk?

    Learn about market risk and the four primary sources of market risk including equity, interest rate, foreign exchange and ... Read Answer >>
Hot Definitions
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  2. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  3. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  4. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center