Facultative Reinsurance

What is Facultative Reinsurance?

Facultative reinsurance is the oldest and most flexible form of reinsurance, arranged on a risk-by-risk basis. The term derives from the Latin facultas — meaning option or ability — reflecting the fact that both the cedant and the reinsurer have a choice in each transaction: the cedant may choose to offer any specific risk for facultative placement, and the reinsurer has the full underwriting discretion to accept, decline, or modify the terms on which it is willing to participate. There is no standing obligation on either side, unlike treaty reinsurance.

Each facultative placement is a discrete underwriting transaction. The cedant (usually through a reinsurance broker) submits a risk information package to one or more potential reinsurers, who assess the risk and respond with a quotation or declination. If the cedant accepts a quotation, the terms are formalised in a placing document (in the London Market, a slip) which constitutes the reinsurance contract. The placement may be subscribed by a single reinsurer or, for large risks, syndicated across multiple reinsurers each taking a percentage line.

When Facultative Reinsurance is Used

Facultative reinsurance is deployed where treaty reinsurance either does not apply or does not provide sufficient capacity. Common scenarios include: risks that are specifically excluded from treaty wordings (e.g., a property treaty may exclude single risks above £50m in value, requiring facultative placement for any risk above that threshold); non-standard or unusual risks with hazardous characteristics that reinsurers are unwilling to accept automatically under a treaty; individual large risks requiring more capacity than the treaty provides; and risks in classes or territories not covered by the cedant's treaty programme.

Facultative reinsurance is therefore most common in commercial lines — large property, energy, marine, aviation, and construction risks — where individual policy values or liability limits can be very large and risk characteristics vary significantly from policy to policy. It is less common in personal lines, where treaty reinsurance dominates due to the high volume and relative homogeneity of individual risks.

Facultative vs. Treaty: The Key Distinction

The fundamental operational difference is that treaty reinsurance provides automatic, guaranteed capacity for qualifying risks, while facultative placement requires individual negotiation and carries the risk that no reinsurer may be willing to participate on acceptable terms. From a cost perspective, facultative reinsurance typically carries a higher expense loading than treaty reinsurance, reflecting the additional placement effort involved. However, for risks outside treaty parameters, it is often the only available mechanism.

Documentation and Placement Process

Facultative placements generate significant documentation requirements. The submission package typically includes a risk information sheet, completed proposal form, loss history, inspection reports where available, and the proposed primary policy wording. Once placed, the reinsurance contract — the slip or facultative certificate — must be stored, tracked, and monitored alongside claims activity. If a loss occurs on a facultatively reinsured risk, the cedant must notify the reinsurer promptly and provide supporting documentation to enable the recovery process. Systematic management of facultative placement records is essential, particularly for cedants with large numbers of concurrent individual placements.