Facultative
Reasuransi
by : Siti Sarah
What is Reinsurance
• Is a form of insurance
• Insurance of insurance (a second
insurance)
• Insuring insurers
• An arrangement between those who
assume risk
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What is Reinsurance
Risk Insured / Risk
Insurance
Cedent (Co-insurer)
Insurance Company
Reinsurance Reinsurance Reinsurance Reinsurer
Company Company Company
Reinsurance Reinsurance Reinsurance Reinsurance Retrocessionaire
Company Company Company Company
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Characteristics
• Individual risk review
• Right to accept or reject
• Majority a short term relationship]
• Profit dependent on reinsurer’s risk
selection
• Single contract from each risk
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Purpose
• Provided cover to risk excluded from a treaty
• Protect the treaty from adverse underwriting result
• Protect the company’s net retention
• Provide additional capacity
• Accommodate partners for business reasons
• Reduce its catastrophe exposure from a single risk
• Help in the spread of risk on new line of business
• Secure expertise from the facultative underwriter
• Help Stabilize year end result
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Disadvantages
• The costs are relatively high and time
consuming
• The need to disclose full details of
original risk
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Facultative Property
• Risk Evaluation Factors :
Ownership (Financial)
Management
Construction
Occupancy (common and/or special hazards of risks)
Protection (private & public)
Exposure
Rate (tarif rate when available)
Total Sum Insured
Loss History
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Facultative Property
• Factors affecting pricing :
The risk’s characteristics & operations
The type & probability of loss
Potential Loss frequency and severity
Impact of inflationary forces
Expertise in the particular class of business
Loss activity
Risk Management
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Facultative Property
• Check List for Facultative Property
Offers :
Line (fire, LOP, etc)
Insured (risk name)
Occupancy (business activity/type of risk)
Location (location of risk)
Sum Insured/TSI (currency & breakdowns of value : building,
machinery, stock, etc)
Our share in %
Our Retention
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Facultative Property
• Check List for Facultative Property
Offers (Cont'd):
Facultative share offered (amount or % or open)
MPL/EML (Maximum Possible Loss/Estimated Maximum Loss – if
any)
Perils Covered
Rate/Annual Premium
Reinsurance commission
Period of Insurance
Period of Reinsurance
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Facultative Property
• Check List for Facultative Property
Offers (Cont'd):
Loss Protection (fire protection measures, alarm system,
time/distance to fire brigade)
Class Construction
Survey Report (if needed, a summarize underwriting info will do)
Deductibles/Time Excess
Loss Experience (at least 3 – 5 years)
Clauses/Warranty (if any)
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Types of Reinsurance Methods
Whether facultative or treaty, reinsurance can
be grouped into two broad types :
Proportional Reinsurance
Non Proportional Reinsurance
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Proportional Reinsurance
Definition :
Reinsurance based on insured value
Premiums and losses are divided
between the parties according to their
respective shares of the risk i.e
Proportionally
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Non-Proportional Reinsurance
Definition :
Reinsurance based on Loss Amount
Premiums and losses are not divided
The cedant pays a calculated premium
The reinsurer contributes to losses
when they exceed a certain limit
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Facultative Property
• Proportional – Retention on TSI basis
Risk TSI : $ 12.50 M Premium : $. 25,000
Ret : 40% Fac R/I : 60%
Pro-Rata :
Ret : 40 % x $ 12.50 M = $ 5.0 M
Premium : 40 % x $ 25,000 = $ 10,000
Fac R/I : 60 % x $ 12.5 M = $ 7.50 M
Premium : 60 % x $ 25,000 = $ 15,000
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Facultative Property
• Proportional – Loss distribution
Risk TSI : $ 12.50
Ret : 40% Fac R/I : 60%
Loss of $ 4.0 M
Ret 40 % = $ 1.60 M
Fac R/I 60 % = $ 2.40 M
Loss of $ 8.0 M
Ret 40 % = $ 3.20 M
Fac R/I 60 % = $ 4.80 M
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Facultative Property (XOL)
• Advantages to cedant :
1. Reduce outflow of premium
2. Reduce administration of small claims
3. Original Proportional terms may be unacceptable
to reinsurers
4. Additional capacity form specialist XL
underwriters
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Facultative Property (XOL)
• Main disadvantage to cedant :
Must ensure right retention level and
adequate premium for retention otherwise
first loss retention can be very expensive
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Facultative Property
XOL : Distribution of Loss
Risk : TSI $ 12.50
Layer Limit : $ 7.50 M
X/s Point : $ 5.00 M
Loss of $ 4.0 M
Layer (Recovery) =$0
X/s Point (Retention) = $ 4.0 M
Loss of $ 8.0 M
Layer (Recovery) = $ 3.0 M
X/s Point (Retention) = $ 5.0 M 19
Facultative Property
Comparison of Loss Cost – Pro Rata vs Excess of Loss
Pro Rata Excess of Loss
Loss of $4.0M
Ret 40%=$1.60M Ret = $4.0M
Recovery 60%=$2.40M Recovery = $0
Loss of $8.0M
Ret 40%=$3.20M Ret = $5.0M
Recovery 60%=$4.80M Recovery = $3.0M
Total Loss $12.50M
Ret =$5.0M Ret = $5.0M
Recovery =$7.50M Recovery = $7.50M
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