insurance

Facultative Reinsurance

A type of reinsurance arrangement where the primary insurance company has the option to transfer specific individual risks to a reinsurance company, and the reinsurer has the option to accept or decline each risk separately. This is typically used for unusually large or high-risk policies that exceed the insurer's normal retention limits.

Example

“When ABC Insurance received an application for a $10 million life insurance policy, they used facultative reinsurance to transfer $8 million of the risk to XYZ Reinsurance Company.”

Memory Tip

Think 'Faculty has OPTIONS' - facultative reinsurance gives both the insurer and reinsurer the option (like faculty choosing courses) to accept or decline each individual risk.

Why It Matters

Facultative reinsurance allows smaller insurance companies to compete for large policies they couldn't normally handle alone, expanding their business opportunities while managing risk exposure. This ultimately benefits consumers by increasing competition and making high-value coverage more widely available.

Common Misconception

Many people think facultative reinsurance is automatically applied to all large policies, but it's actually negotiated case-by-case with reinsurers who can reject risks they deem too dangerous. Unlike treaty reinsurance where the reinsurer must accept all qualifying risks, facultative reinsurance involves individual underwriting decisions for each policy.

In Practice

Regional Insurance Company typically keeps $2 million maximum on any life policy but receives an application for $5 million coverage on a healthy 40-year-old executive. They decide to keep $2 million and seek facultative reinsurance for the remaining $3 million. After reviewing medical records and financial information, Global Reinsurer agrees to accept $2.5 million of the risk at a 15% commission, while Specialty Re takes the final $500,000 at 18% commission.

Etymology

From Latin 'facultas' meaning 'capability' or 'option,' indicating the optional nature of this reinsurance arrangement where both parties have the faculty (choice) to participate in each individual risk.

Common Misspellings

facultativ reinsurancefacultative reinsuransefaculative reinsurancefacultative reinsurence

Related Terms

Treaty Reinsurance Risk Transfer

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