Reinsurance

Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit the total loss the original insurer would experience in case of disaster. By spreading risk, an individual insurance company can take on clients whose coverage would be too great of a burden for the single insurance company to handle alone. When reinsurance occurs, the premium paid by the insured is typically shared by all of the insurance companies involved.

To Whom

Facultative reinsurance is commonly purchased for large, unusual or catastrophic risks. Reinsurers thus must have the necessary resources to underwrite individual risks carefully.

Uses of Facultative Reinsurance

• When an insurer is offered a risk that exceeds its standard underwriting or reinsurance limits for that class, facultative reinsurance can permit the ceding company to accept the risk.
• Insurers can fill gaps in coverage caused by reinsurance treaty exclusions by seeking separate facultative coverage for a specific policy or group of policies.
• A reinsurer can issue facultative reinsurance to participate in a market in the short term to minimize risk and take advantage of favorable rates.
• A treaty reinsurer may purchase facultative reinsurance to protect itself and its treaty reinsurers.