Facultative Facility

Concept

A facultative facility is an agreement between a cedent and a reinsurer that allows the cedent to automatically place individual risks with the reinsurer within predefined limits agreed in advance (for example regarding line of business, region, or maximum sum), without requiring separate negotiation and approval from the reinsurer for each individual risk.

Distinction from Classic Facultative Reinsurance

Unlike classic facultative reinsurance, where the cedent and reinsurer review and individually agree on each risk separately, a facultative facility dispenses with risk-by-risk review by the reinsurer as long as the given risk falls within the pre-established facility limits; this significantly speeds up the placement process.

Advantages and Limitations

A facultative facility combines the administrative efficiency of treaty reinsurance with the flexibility to place individual risks selectively; it is particularly suited to cedents with a recurring need for facultative capacity for similarly structured risks, with the reinsurer usually reserving the right to adjust or cancel the facility if certain loss ratios are exceeded.