8

Outline

Facultative Reinsurance

CHARACTERISTICS                                                                295
     Individual Risk Reinsurance
     Individual Negotiation and Nonobligatory
     Adverse Selection

USES OF FACULTATIVE                                                        297
     Increase Capacity
     Protect the Net Line
     Protect the Treaty
     Reduce Loss from Catastrophe
     Offset Treaty Exclusions
     Provide Underwriting Assistance
     Provide Marketing Accommodation
     Achieve Growth and Expansion
     Permit Withdrawal

COVERAGE: PRO RATA V. EXCESS OF LOSS                   299

UNDERWRITING                                                                      301
     Layering Exposures to Loss: Primary, Buffer, Catastrophe
     Contributing Excess
     Pricing
          Loss Adjustment Expense
          Acquisition Expense, Internal Company Expense,
               and Profit
          Deviation from Published Increased Limit Factors
          Risk Characteristics
          Inflation and Investment Income
          Primary Insurer Expertise

CONTRACTS USED IN FACULTATIVE REINSURANCE 312
     Certificate of Reinsurance
     Automatic and Program Agreements

THE FACULTATIVE MARKETPLACE                                315
     Sellers and Buyers
     Distribution Systems
     Choosing a Reinsurer

SUMMARY                                                                                317

8

Facultative Reinsurance

by John D. Countryman *

CHARACTERISTICS

     The transactions of reinsurance can be divided into many subdivisions. Probably the most important distinction is between treaty and facultative, both of which should be understood in order to appreciate the contributions of facultative. Treaties, as explained earlier in this book, provide either proportional or nonproportional coverage -- in proportion, that is, to the reinsured's insurance protection (as in quota share and surplus share), or not in proportion (as in excess of loss). If proportional, the treaties oblige the reinsured (the cedent or ceding company) to cede and the pro rata reinsurer to assume an agreed portion of insurance policy premium and the accompanying insurance liability associated with a group of policies written by the company. The proportional treaties provide for sharing of losses by reinsured and reinsurer in the designated proportion, beginning with the first dollar of loss incurred by the cedent. Each group of policies so affected is defined by the reinsurance agreement.

   If, on the other hand, the treaties are nonproportional, the reinsured (the insurance company) does not cede premium and accompanying liability; instead, the treaties provide reinsurance for a group of policies -- for indemnification by the excess of loss reinsurer of the reinsured's excess losses. Excess losses are defined as those amounts in excess of the reinsured's loss retention, which is the amount of the total insured loss that the reinsured agrees to absorb or bear prior to application of the reinsurance. By definition, the nonproportional reinsurance premium is not in proportion to either the policy premium or the insurance liability.

     With either proportional or nonproportional treaty, the reinsurer may not pick and choose those policies to reinsure from among the . . .


* CPCU, Senior Vice President, Facultative Reinsurance, RELIANCE REINSURANCE CORP., One Penn Center, 12th Floor, Philadelphia PA 19103. An autobiography follows the chapter.

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