A reinsurance contract under which the ceding company has the option to cede and the reinsurer is obliged to accept cessions of risks of a defined class, provided the risks fall within the contract guidelines.
In proportional reinsurance, it is the reinsurance of part or all of the insurance provided by a single policy, with separate negotiation for each policy cession of insurance - for sharing liability, premium, and loss.
In excess of loss reinsurance, it is the reinsurance of each policy, with separate negotiation for each - for indemnity of loss in excess of the reinsured's loss retention.
The word "facultative" connotes that both the primary insurer and the reinsurer usually have the "faculty" or option of accepting or rejecting the individual submission (as distinguished from the obligation to cede and accept, to which the parties agree in most treaty reinsurance).
A common form of proportional reinsurance treaty under which the amount of each cession is defined as the amount of gross (policy) liability that exceeds, or is "surplus" to, an agreed net liability retention, up to the limit of (reinsurance) liability. Often, a maximum net retention is specified in the treaty, with the ceding company having the option to choose a lesser retention on individual risks. The amount of first surplus reinsurance provided will be limited to a fixed multiple of the selected retention in each case. Higher surplus treaties, termed "second", "third", and so on, can be arranged to provide the ceding company with additional reinsurance capacity beyond that provided by the prior surplus treaty plus its true net retention.
An arrangement whereby a licensed insurer, for a specified fee or premium, issues its policies to cover certain risks underwritten or otherwise managed by another insurer or reinsurer with the intent of passing all, or substantially all, of the liabilities thereunder to such insurers by means of reinsurance. Such an arrangement may be illegal if the purpose is to frustrate regulatory requirements.