Difference Between Facultative And Treaty Reinsurance

Reinsurance is a type of insurance contracts where one insurance company agrees to indemnify another insurance company (called cedent) against all probable loss. Indemnification may be either partly or fully that the insured (latter company) sustains under a reinsurance policy or policies that the former has issued. There are two main types of reinsurance policies found in insurance business. They are Facultative and Treaty.

Because of their intrinsic substance, there are some difference Between Facultative And Treaty Reinsurance as given below.

Difference Between Facultative And Treaty Reinsurance

  • RISK BUYING: Facultative reinsurance is individual risk buying whereas Treaty reinsurance is buying insurance over an entire book of business or over one specific line of insurance coverage.
  • OPTION: In facultative reinsurance, the ceding company (insured) has the option to offer an individual risk to the re-insurer and the re-insurer retains the right to accept or reject the risk. But in case of Treaty, the re-insurer must accept all business included within the terms of the reinsurance contract.
  • PROFITABILITY: In facultative reinsurance, a profit is expected by the re-insurer in the short and long term which depends primarily on the risk selection process of the re-insurer. But in Treaty reinsurance, a long-term relationship in which the re-insurer’s profitability is expected but measured and adjusted over an extended period of time.
  • CERTIFICATE: In facultative reinsurance, a facultative certificate is written to confirm each transaction but in case of a Treaty, one treaty contract encompasses all subject risks so no individual certificate required.
  • COST: Facultative reinsurance in costly but treaty reinsurance is less costly than “per risk/individual risk” based reinsurance

An excellent instance of a facultative reinsurance is an Industrial risk with a very high total insurable value (Maximum Possible Loss). The primary insurer might not have the capacity to give the requested limits of coverage. To give this coverage, the primary insurer submits to the risk to the second insurer (re-insurer) to facilitate the coverage. If the re-insurer (second insurer ) agrees, insurance coverage is written and a facultative reinsurance contract is formed.

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