Facultative agreements

Facultative agreements (also known as facs) are always for per risk insurance. They are used to reinsure risks that do not fall within the reinsurance coverages provided by the treaties in a program.

Some insurers have reinsurance agreements that provide broad terms for coverage that do not explicitly specify the risks. For example, an insurer has a reinsurance agreement that can be attached to a class of risks without further negotiation with the reinsurer. In PolicyCenter, you can model this agreement as a treaty that attaches to a class of risks based on business logic or is included by a user in a program.

For a specific risk, the insurer and the reinsurer each have free choice in arranging the reinsurance. The insurer is free to decide whether or not to reinsure a particular risk and can offer the reinsurance to any reinsurer it chooses. By the same token, it is at the reinsurer’s discretion whether to accept any risk offered, decline it, or negotiate different terms.

A facultative agreement provides reinsurance for claims that fall within a specified range. The facultative agreement reinsures a specific amount.

For example, a policy provides insurance up to $4 million. A number of treaties provide coverage for claims up to $2 million. For a specific risk on the policy, the insurer negotiates two proportional facultative agreements to provide coverage for claims valued at $2 million to $4 million. One facultative agreement provides reinsurance coverage for $500,000. The second facultative agreement provides reinsurance coverage for $1.5 million. If the risk suffers a loss of $4 million, the treaties provide reinsurance for the first $2 million. The two facultative agreements provide reinsurance for the remaining $2 million.