Facultative Reinsurance

Facultative reinsurance is a form of reinsurance in which a reinsurer reviews and accepts or rejects individual risks (or specific blocks of risk) offered by a primary insurer. It provides tailored, policy-by-policy coverage for unusual, large, or otherwise atypical exposures that a primary insurer prefers not to retain fully.

Key takeaways

• Facultative reinsurance covers individual risks rather than whole classes of business.
• Reinsurers evaluate each risk specially and can accept or decline on a case-by-case basis.
• It is flexible and well suited for large, unusual, or catastrophic exposures but generally more expensive and resource‑intensive than treaty reinsurance.
• Treaty reinsurance, by contrast, automatically covers a defined class of risks without individual review.
• Both facultative and treaty approaches help insurers protect solvency and increase underwriting capacity.

How facultative reinsurance works

• The primary insurer (the ceding company) identifies a specific risk or policy it does not want to retain entirely.
• The ceding company offers that risk to one or more reinsurers.
• Each reinsurer reviews the underlying policy, underwriting details, and exposure and decides whether to accept that portion of the risk.
• Accepted risks are documented in a facultative certificate or agreement that specifies the terms, limits, and premium sharing.
• Multiple reinsurers can each take a portion of the same risk to cover the exposure the ceding company cannot or will not retain.

Reinsurance contracts—both facultative and treaty—can be structured on a proportional basis (sharing premiums and losses in a set percentage) or on an excess-of-loss basis (reinsurer covers losses above a threshold), or a combination of both.

Facultative vs. Treaty reinsurance

Scope
* Facultative: Policy-specific, applied to single risks or defined exposures.
* Treaty: Covers an entire class or portfolio of business automatically under agreed terms.

Underwriting
* Facultative: Reinsurer reviews individual risks and can accept or reject them.
* Treaty: Reinsurer accepts all risks meeting treaty criteria; emphasis is on reviewing the ceding insurer’s underwriting practices and historical experience.

Use cases
* Facultative: Large commercial properties, unique or catastrophic risks, and one-off exposures.
* Treaty: Routine lines of business where predictable, portfolio-level sharing is preferred.

Cost and administration
* Facultative: More costly per risk and requires significant underwriting resources.
* Treaty: Economies of scale reduce per-risk cost and administrative burden.

Advantages of facultative reinsurance

• Precision: Tailors coverage to specific, atypical, or very large exposures.
• Flexibility: Allows ceding companies to place risks they would otherwise decline.
• Capacity: Enables insurers to underwrite larger or more concentrated policies without exceeding retention limits.
• Solvency protection: Helps manage capital and liquidity needs by transferring portions of potential losses.

Considerations and drawbacks

• Higher cost: Pricing reflects the detailed underwriting and one-off nature of facultative placements.
• Resource intensity: Requires significant technical and personnel resources to assess individual risks.
• Market availability: For very large or unusual risks, finding reinsurers willing to take the exposure can take time and negotiation.

Example

A primary insurer is asked to insure a corporate office building for $35 million. It is willing to retain only $25 million of the exposure. Before issuing the policy, the insurer seeks facultative reinsurance to cover the remaining $10 million. Several reinsurers each evaluate the property risk; a group of reinsurers agrees to take pieces of the $10 million. With those commitments in place, the insurer issues the $35 million policy confident that the excess exposure is covered.

Bottom line

Facultative reinsurance is a targeted tool for transferring specific risks that a primary insurer cannot or prefers not to retain. It offers flexibility and precision for large, unusual, or catastrophic exposures but comes with higher costs and greater administrative demands compared with treaty reinsurance. Insurers typically use a mix of facultative and treaty arrangements to balance cost, capacity, and risk-management needs.