What is facultative reinsurance example?

What is facultative reinsurance example?

A good example of the use of facultative reinsurance is a property risk with a very high total insurable value (TIV, or Maximum Possible Loss). The primary insurer agrees to cede all risks within a defined class or classes to the reinsurer.

What are the types of facultative reinsurance?

Types of Facultative Reinsurance

• Pro Rata. The ceding company and reinsured share premium and losses on specific risks in proportion to an agreed percentage.
• Excess of Loss.
• Facultative Casualty Reinsurance.
• Facultative Property Reinsurance.

What does facultative reinsurance mean?

Facultative reinsurance is reinsurance purchased by an insurer for a single risk or a defined package of risks. Usually a one-off transaction, it occurs whenever the reinsurance company insists on performing its own underwriting for some or all the policies to be reinsured.

What is a excess of loss reinsurance?

Excess of loss reinsurance is a type of reinsurance in which the reinsurer indemnifies–or compensates–the ceding company for losses that exceed a specified limit. Excess of loss reinsurance is a form of non-proportional reinsurance.

How does facultative reinsurance work?

Facultative reinsurance allows the reinsurance company to review individual risks and determine whether to accept or reject them. In a facultative reinsurance arrangement, the ceding company and the reinsurer create a facultative certificate that indicates that the reinsurer is accepting a given risk.

What is reinsurance treaty and facultative?

Treaty reinsurance involves a single contract covering a type of risk and does not require the reinsurance company to provide a facultative certificate each time a risk is transferred from the insurer to the reinsurer. Facultative risk, on the other hand, allows the reinsurer to accept or reject individual risks.

Is facultative reinsurance proportional?

Both treaty and facultative reinsurance contracts can be written on a proportional or excess-of-loss basis (or a combination of both). Facultative reinsurance contracts are much more focused in nature. They cover individual underlying policies, and they are written on a policy-specific basis.

What are the two types of proportional reinsurance?

Types of proportional reinsurance include quota share treaties, surplus treaties and facultative-obligatory treaties. Non-proportional reinsurance, or excess of loss basis, is based on loss retention.

What is proportional facultative reinsurance?

Proportional Facultative Reinsurance: This is by far the most common form of facultative reinsurance used. It works in principle the same way as a Quota Share reinsurance. The Cedant offers the Facultative Reinsurer a clearly defined proportion of risk.

What is ultimate net loss in reinsurance?

In reinsurance, ultimate net loss refers to the unit of loss to which the reinsurance applies, as determined by the reinsurance agreement. In other words, the gross loss less any recoveries from other reinsurance which reduce the loss to the treaty in question.

What is the difference between surplus and excess of loss reinsurance?

Surplus share agreements allow the primary insurer to cede a certain percentage of liabilities exceeding a pre-determined retention. Excess of Loss Reinsurance: The reinsurer agrees to indemnify the primary insurer for all losses exceeding a specified retention either on a per loss basis or an aggregate loss basis.

What are the advantages of facultative reinsurance?

In brief, certain advantages of facultative reinsurance are: risks are considered individually; it increases the insurer’s competitive edge within its chosen market; the freedom to offer any risk (insurer) which may be accepted or declined (reinsurer);

What are the different types of excess of loss insurance?

Types of Excess of Loss Reinsurance. The three forms of excess of loss reinsurance are: 1. Per Risk XL. In Per Risk XL, the cedant’s insurance policy limits are greater than the amount of reinsurance retention. An example will be if an insurance company insures commercial property risks with policy limits up to $5 million.

How does excess of loss ratio reinsurance work?

The arrangement with the reinsurers is such that if at the year-end it is found that the total of all losses within the class has exceeded the predetermined loss ratio then the reinsurers will pay the balance loss so as to keep the loss ratio of the ceding company within the predetermined ratio. The treaty may contain an upper limit also.

How are treaty and facultative reinsurance contracts similar?

In this way, treaty and facultative reinsurance contracts are similar to a standard insurance contract, which provides coverage up to a specific amount. While this is beneficial to the reinsurer, it places the onus on the insurance company to reduce losses. Excess of loss reinsurance takes a different approach.

What do you mean by excess of loss?

What is ‘Excess Of Loss Reinsurance’. Excess of loss reinsurance is a form of non-proportional reinsurance. Depending on the language of the contract, it can apply to either all loss events during the policy period or losses in aggregate. Treaties may also use bands of losses that are reduced with each claim.