Facultative reinsurance covers a single, specified risk. The reinsurer evaluates that risk on its own merits and may accept or decline it; the word facultative means the reinsurer retains the faculty to choose.
Facultative proportional
The reinsurer takes an agreed share \\(c\\) of the original risk; premium and losses are shared in that proportion, less a ceding commission.
Worked example
A cedant shares 50% of a \(20\text{M}\) property risk facultatively. The reinsurer receives 50% of the premium and, on a \(6\text{M}\) loss, pays \(0.5 \times 6 = 3\text{M}\).
Facultative excess of loss
The reinsurer responds only when the loss on the specified risk exceeds an agreed retention \\(d\\), up to a limit \\(\ell\\), so the recovery is \\(R(X)=\min(\max(X-d,0),\ell)\\).
Worked example
A \(10\text{M xs }5\text{M}\) facultative cover on a large risk. A \(9\text{M}\) loss recovers \(\min(\max(9-5,0),10)=4\text{M}\); the cedant keeps \(5\text{M}\).
Facultative vs. treaty
| Feature | Facultative | Treaty |
|---|
| Unit of cover | Single risk | Portfolio of risks |
| Acceptance | Risk-by-risk choice | Automatic / obligatory |
| Typical use | Large / complex / unusual | Homogeneous, high-volume |
Power Re & facultative
Facultative reinsurance is central to Power Re's model; it lets us apply technical underwriting to each exposure and build a portfolio by selection, not by volume.
