Placement StructuresCore

Facultative Reinsurance

Q: The defining difference between facultative and treaty reinsurance is that facultative is:

Optional for both parties on each individual risk — Treaty is obligatory and automatic; facultative is optional and negotiated one risk at a time. Cost follows from that, but it is not the definition.

Q: A facultative cover "inures to the benefit of the treaty". This means:

The fac recovery is deducted before the treaty responds — Inuring covers apply first. The treaty only sees the loss net of the facultative recovery, which is why placing fac protects the treaty result — and why treaty reinsurers care how much fac you buy.

Risk by risk

A one-off cession of a single risk, individually offered and individually accepted.

Open the interactive version → definition, quiz, structure diagram and progress tracking

Definition

Facultative reinsurance is negotiated risk by risk. The cedent offers a specific policy; the reinsurer is free to inspect it, price it, amend the terms or decline it outright — the word "facultative" means optional. It is the tool for risks that are too large for the treaty, excluded from it, or simply unusual enough to want a second opinion on.

Used for: capacity above treaty limits, treaty-excluded perils or occupancies, and risks the cedent wants off its net account for accumulation reasons.
Expensive per unit of cover — every placement is individually underwritten, documented and brokered.
Facultative usually inures to the benefit of the treaty: the fac recovery is deducted before the treaty is asked to respond.

Worked example

A cedent with $100M of automatic capacity is asked to write a $400M petrochemical plant. It places $300M facultatively across three reinsurers before it can bind the risk.

Scenario · figures in USD

Placing a refinery beyond the treaty

Continental Fire is offered a refinery with a $400M sum insured. Its net line is $10M and its treaty provides $90M of automatic capacity above that. The remaining $300M is placed facultatively — 50% / 30% / 20% across three reinsurers. A fire causes a $200M partial loss.

Sum insured	$400M
Cedent net line — 2.5% of the risk	$10M
Treaty capacity — 22.5%	$90M
Facultative placement — 75%	$300M
Partial loss	$200M
Cedent share of loss (2.5%)	$5M
Treaty share of loss (22.5%)	$45M
Facultative share of loss (75%)	$150M
— split 50 / 30 / 20	$75M · $45M · $30M

So whatFacultative turns an unwritable risk into a written one. The cedent earns the full $400M of premium while carrying $10M of exposure.

Check your understanding

The defining difference between facultative and treaty reinsurance is that facultative is:

Optional for both parties on each individual risk. Treaty is obligatory and automatic; facultative is optional and negotiated one risk at a time. Cost follows from that, but it is not the definition.

A facultative cover "inures to the benefit of the treaty". This means:

The fac recovery is deducted before the treaty responds. Inuring covers apply first. The treaty only sees the loss net of the facultative recovery, which is why placing fac protects the treaty result — and why treaty reinsurers care how much fac you buy.

Word problem

A cedent writes a $250M stadium risk. Net line $5M, treaty capacity $45M, the remaining $200M placed facultatively. Annual premium on the risk is $1.25M. A total loss occurs. Show the premium and loss split three ways.

Show a hint

Everything is proportional to the share of the sum insured. Work out the three percentages first.

Reveal the worked answer

Cedent share = $5M ÷ $250M = 2%
Treaty share = $45M ÷ $250M = 18%
Facultative share = $200M ÷ $250M = 80%
Premium: cedent $25,000 · treaty $225,000 · facultative $1,000,000
Total loss $250M: cedent $5M · treaty $45M · facultative $200M

The cedent keeps $25,000 of premium and $5M of exposure on a $250M risk. It has bought itself the client relationship — and around 2% of the economics.