Facultative Reinsurance Training Notes

Introduction

Presenter: Prasad Parthiman
Topic: Facultative Reinsurance
Previous Session: Covered 3T Reinsurance (treaty reinsurance for a class of risk)

Coverage for a class of risk
Involves a contract between the ceding company (insurance company) and reinsurance company
Provides blanket coverage for all policies under the specified class for a set period (e.g., one year)

Nature: More unique and specific compared to treaty reinsurance
Example: Commercial property insurance with unique coverages like equipment breakdown
Process:
- Insurance company seeks reinsurance for specific risks rather than an entire book of business
- Requires shopping around in the insurance market for coverage
- Typically sought out for risks that the company cannot insure alone due to lack of infrastructure or high risk
Comparison with Treaty:
- Facultative is transactional and risk-based
- Treaty covers a class of risks and is long-term
Premiums: Typically higher for facultative reinsurance due to its one-off nature

Quota Share:
- Premiums and losses are shared equally between insurance and reinsurance companies
- Example: $100 premium, $500k coverage, both parties share 50%
Surplus Share:
- Involves a surplus point pre-determined by agreement
- Example: $1,000 premium, $1 million coverage, 200k surplus point
- Insurance handles up to surplus point; remainder split proportionally

Excess of Loss:
- Coverage kicks in after a certain loss limit
- Example: $1,000 premium, $1 million coverage, 600k excess of loss
- Insurance company covers up to loss limit, reinsurance covers the rest
- Premiums are negotiated, not split proportionally

Facultative reinsurance provides flexible, specific risk coverage
Different from treaty reinsurance in scope and financial arrangement
Proportional and non-proportional methods illustrate varied approaches to premium and loss distribution