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.