facultative vs treaty reinsurance
/ facultative = FAK-uhl-tay-tiv /
There are two fundamentally different ways to buy reinsurance, and the difference is like buying car insurance for one specific exotic car versus buying a fleet policy that automatically covers every vehicle your company owns. Facultative reinsurance is the single-risk version: the cedant offers one particular policy to the reinsurer, who looks at it and decides, case by case, whether to accept it. Treaty reinsurance is the blanket version: a standing agreement under which the reinsurer automatically accepts a whole defined class of business, without examining each policy.
Facultative ('fac') means optional — the reinsurer is free to accept or decline each risk on its own merits, and the cedant is free to offer it or not. It is used for unusual, very large, or risky individual policies that fall outside the cedant's normal treaties, or for capacity on a single jumbo exposure. Treaty reinsurance, by contrast, is obligatory and automatic for both sides within its agreed terms: once the treaty is in force, every qualifying policy the cedant writes is reinsured by it without further negotiation, which is efficient and gives the cedant certainty of cover as it writes new business. Treaties can be proportional (quota share, surplus) or non-proportional (excess of loss).
In practice insurers use both together: treaties handle the routine bulk of the book smoothly and automatically, while facultative fills the gaps — the oddball skyscraper, the satellite launch, the risk that breaches treaty limits. The trade-off is effort versus control: facultative gives the reinsurer full underwriting control on each risk but is slow and labour-intensive; treaty is fast and frictionless but commits the reinsurer to risks sight unseen, so it must trust the cedant's underwriting. A common confusion is to think facultative and treaty are kinds of risk-sharing math like proportional versus non-proportional — they are not; they describe how the cover is arranged (one risk at a time versus automatically), and either can itself be proportional or excess of loss.
An insurer's surplus treaty automatically reinsures every commercial property it writes up to 5 million. A client then asks it to insure a 40 million chemical plant — far outside the treaty. The insurer arranges facultative cover for that one plant, negotiating terms with a reinsurer specifically for it, while all its ordinary buildings keep flowing through the treaty untouched.
Treaty is automatic for a whole class; facultative is negotiated risk by risk.
Facultative versus treaty describes how cover is arranged, not how risk is shared. Either arrangement can be proportional or excess of loss — do not equate facultative with one kind of math.