FACULTATIVE REINSURANCE

See FACULTATIVE OBLIGATORY

As the name implies, the facultative obligatory treaty has the characteristics of both facultative cessions and obligatory treaties. It is an agreement whereby the REINSURED has the option to cede or not and the reinsurer is bound to accept those risks ceded.

FACULTATIVE REINSURANCE

Reinsurance by offer and acceptance of individual risks whereby the reinsurer has the option to accept or reject each risk offered.

The first LAYER of excess of loss coverage. The term has also been used in the LMX market to refer to the first excess (i.e. an additional deductible) that the reinsured retains for its own account before the excess of loss reinsurer becomes liable.

The surplus treaty immediately surplus to the reinsured’s retention and to which cessions must be made in priority over all other surplus treaties.

Contracts which operate for a fixed term only, whereupon they terminate automatically. The term "annual contracts" is used to describe those contracts that are issued for 12 month periods. See also CONTINUOUS TREATIES

A reinsurance contract for a fixed amount, with the REINSURER paying the claim up to the agreed amount and the REINSURED bearing the loss above the agreed amount.

Flag, Ownership or Management. Often reinsurers will restrict a reinsured’s hull underwriting to only those vessels registered, owned or managed by companies or individuals domiciled in the same country as the reinsured.

In order to formalise the documentation for policy signing at Lloyd’s, the ILU and LIRMA it is usually necessary for there to be a payment of premium. However PROPORTIONAL TREATIES, BINDING AUTHORITIES AND LINESLIPS also need to be formalised (and usually prior to the payment of any premium). In order to achieve this an FDO closing is made to the various market BUREAUX.

A relief to insurers (or reinsurers) of each and every loss that does not exceed a specified amount. A "franchise deductible" will require the reinsured to retain the whole of the loss if the loss does not exceed an agreed amount but in the event that the agreed amount is exceeded the whole of the loss will be payable by the reinsured.

Insurance and reinsurance companies writing SUBSCRIPTION MARKET business on the "fringe" of the Lloyd’s market. These companies tend to rely on brokers for the production of business and do not usually have a branch network. These are to be contrasted with the PROFESSIONAL REINSURERS and/or the UK Composite insurers who write a range of non-life insurances on a world-wide scale and who are not reliant upon London Market business.

See FRONTING

On occasion an insurer might not be allowed to accept an insurance risk (e.g. it might not be authorised to accept business in that jurisdiction or it might be authorised only to write reinsurance rather than direct insurance). In such event it (or the broker involved) might arrange for an authorised insurer to "front" the business, which is then ceded to the initial company as a reinsurance. The "fronting" insurer is remunerated by way of a fee (which is generally in the form of an over-riding commission on the premium). The practice of providing fronting capacity has one major pitfall which is that the fronting insurer is liable to the insured for the whole of the exposure. This could be a problem in the event that the reinsuring company cannot or will not pay a claim.

A clause which is usually contained in the reinsurance documentation which states:

Being a reinsurance of and warranted same gross rates, terms and conditions as and to follow the settlements of the Insurer.

or words to that effect.