What facultative reinsurance is

Facultative reinsurance is the transfer of one specific risk or one insurance policy to a reinsurer. The insurer (the cedent) sends the reinsurer a description of the risk, and the reinsurer may accept it in full, take a share, propose its own terms or decline. Each placement is negotiated separately, which makes facultative cover the most flexible and also the most labor-intensive form of reinsurance.

"Facultative" means "optional": the insurer is not obliged to offer the risk, and the reinsurer is not obliged to accept it. This is the key difference from treaty (obligatory) reinsurance, where an entire portfolio of a given class is ceded automatically under rules agreed in advance.

When insurers use facultative cover

  • The risk exceeds treaty capacity. A large plant, shopping center, sea-going vessel or infrastructure facility may need a higher limit than the insurer's obligatory treaties provide.
  • The risk is excluded from the treaty. Treaties often exclude certain activities, territories or perils; facultative cover fills those gaps.
  • Protecting portfolio results. A volatile or unusual risk ceded facultatively does not distort the loss record of the main treaty.
  • New and niche products. Until a new line has its own statistics, the insurer relies on the reinsurer's expertise to assess each risk.
  • Requirements of the policyholder or lender. A bank or a major client may expect confirmation of reinsurance protection for a specific asset.

Proportional and non-proportional facultative

Facultative cover can be proportional: the reinsurer receives an agreed share of the premium, pays the same share of every loss and pays the cedent a reinsurance commission. See proportional reinsurance. It can also be non-proportional (excess of loss): the reinsurer pays only the part of a loss above the insurer's retention, up to a limit, and receives a separately calculated premium. See non-proportional reinsurance.

How a placement works

  1. The cedent prepares a submission: original policy terms, sums insured, a description of the asset, a survey report, the loss history and the share or layer sought.
  2. A reinsurance intermediary or the insurer's reinsurance department approaches reinsurers; a lead reinsurer sets the terms and others follow.
  3. The terms are recorded in a slip and then in a cover note or facultative reinsurance agreement: shares, premium, commission, payment and claims settlement procedures.
  4. When a loss occurs, the cedent notifies the reinsurers, provides the documents and collects their share of the claim.

Practice in Russia

In Russia, reinsurance is governed by Article 967 of the Civil Code and by Law of the Russian Federation No. 4015-1 "On the Organization of Insurance Business in the Russian Federation"; the regulator is the Bank of Russia. Since 2016 the market has had JSC Russian National Reinsurance Company (RNRC, in Russian RNPK), whose sole shareholder is the Bank of Russia. The law requires insurers to offer RNRC a share of each risk they cede to reinsurance (50% of the ceded obligations as a general rule). This is known as the mandatory cession, so RNRC's share is built into the structure of a facultative placement from the outset.

Since 2022, many Western reinsurers have reduced or stopped accepting Russian risks, and transactions and payments with counterparties from unfriendly states are subject to special restrictions. Risks connected with sanctioned persons are ceded to RNRC. The remaining capacity is sought on the domestic market and from reinsurers in countries that have not joined the sanctions, in Asia, the Middle East and the Eurasian Economic Union (EAEU). Such capacity exists but is limited, and every placement requires a check of the counterparty and the payment route.

What to watch

  • Alignment of reinsurance terms with the original policy: scope of cover, exclusions, deductibles, currency.
  • Reinsurer security: financial strength, rating, jurisdiction and the ability to make payments without obstacles.
  • Claims cooperation and claims control clauses.
  • Timing: facultative cover must be confirmed before liability under the original policy begins.

How Polis Re helps

Polis Re specialists help prepare the risk description for reinsurers, select reinsurers and reinsurance intermediaries for the specific asset, compare offers and support the placement through to signed documents and claims settlement. Definitions are in the insurance glossary. To discuss a risk, submit a request.