Non-proportional facultative agreements

Excess of loss

Non-proportional facultative agreements are usually excess of loss agreements.

If a facultative excess of loss agreement insures amounts above other excess of loss agreements, it provides another layer of coverage when no standard treaty is in place. There is no difference from a standard excess of loss situation.

However, if a facultative excess of loss agreement insures amounts above a set of proportional agreements, the behavior is different. When a set of proportional treaties are in place, the idea is to share risks up to the limit of the highest surplus, such as $2 million. For larger risks, a facultative excess of loss agreement can remove the potential for losses larger than $2 million. The risk still looks like a $2 million risk to all the proportional participants.

The insurer charges a premium to cover the cost of the facultative excess of loss agreement plus other costs such as commissions to agents. Since all proportional participants benefit from the facultative excess of loss agreement, the premium is shared proportionally after deducting the cost of the facultative excess of loss agreement.

Net excess of loss

The other type of non-proportional facultative agreement is a net excess of loss agreement. This agreement provides reinsurance after proportional reinsurance and protects only the insurer’s share of the risk.

The net excess of loss premium is not deducted in advance of determining what is shared among the proportional participants.