Reinsurance Tutorials #15 - Season 2
Hi everybody 👋
As a reinsurer, our job is to cover and carry part of the risks underwritten by our client. To do so, we need to carefully understand the needs of our clients. It is crucial if we want to be able to respond to these needs as effectively as possible.
But do we always respond the same way? Of course not!
We already covered obligatory treaties in our previous videos, but when it comes to answering a very specific need, a reinsurer must provide the most adequate structure to cover it.
So, what options does he have and use? Well, we’ll answer to this question in this video.
Let’s start! ⏬
Facultative cover
A Facultative cover is usually used to reinsure a peak in exposure or a policy that is not aligned with the usual business of the insurance company.
For example, it could be a very specific type of business excluded from the main treaty, or a risk with a sum insured above the treaty limit. To avoid modifying its treaty condition only for one or a few risks, the insurer will ask its reinsurer for a tailor-made reinsurance contract. The contract is provided in the form of a one-off transaction between the insurer and the reinsurer.
Pricing a Facultative contract is very different from pricing obligatory treaties. The reinsurer will review the risk in full detail as well as its location and ask for any information it may need to understand the real underlying exposure, just as a primary insurer will do.
For example, let’s say the risk is a warehouse. Are there any sprinklers installed? What is the volume of storage? Are there any flammable materials stored there? How much space is kept between the materials?
All these features and many more are analyzed by the reinsurer. Once the reinsurer has completed its analysis, and unlike a reinsurance treaty covering a company’s entire book of business, the reinsurer can either agree to or decline the coverage of this very specific risk. And that’s why it is call a “facultative”!
For the insurer, one benefit of a facultative contract is that it enables it to meet the specific needs of its clients, especially when there is a tender offer on the market with a small part of the exposure outside its guidelines. In this case, a facultative contract would allow the insurer to acquire tender, and protect its equity and solvency at a fair price.
On the other hand, a facultative contract is a type of reinsurance that is very time-consuming for both parties, as a contract must be managed for each risk and then be submitted on a standalone basis to the reinsurance market.
So, is there any solution in between the traditional obligatory treaty and the facultative? Yes, there is!
This solution is a "Facob" or "open-cover"
A Facob, also called open-cover, is a specific type of reinsurance treaty. In an open-cover treaty, the reinsurer is not covering the overall underlying book of the insurer, (as we do into an obligatory treaty), but it is committing itself to providing capacity and accepting the cession of a category of risks into the program, at solely the insurer’s discretion.
It means that the insurer has the option to cede (or not) its policies to this program and the reinsurer does not have the option to refuse them.
So, there is facultative cession for the insurer, and obligatory acceptance for the reinsurer.
I guess you understand why it is called “Fac-Ob” a bit better now, right?
Facilities and Line Slip
Lastly, two other types of responses are available on the market: Facilities and Line Slip.
Both have a common feature: the binding authority is delegated to a broker, a syndicate or a leading reinsurer. We are calling them “binders”
- A Facility, is usually supported by several reinsurers, providing large capacity based on a pre-agreed contract wording and conditions. Then, the syndicate managing the facility uses this capacity to offer protection to its clients. The participating reinsurers receive premiums and pay losses in proportion to their participation into the facility. Facilities are designed and used to mitigate systemic exposures and very complex risks that require large capacity.
- A line-slip can look quite similar to a Facility as it is usually based on joint capacity between several reinsurers. However, the conditions of reinsurance are not pre-agreed in the wording. Instead, the broker must approach the lead reinsurer only who will either accept or reject the risk on behalf of all other participant in the agreed participation.
So, the Line-slip is a way to reduce the burden of contract management for the reinsurers. That is, of course, with exception to the leader!
Conclusion
Now you are an expert on the different types of responses that can be found on the reinsurance market!
But there’s one last type of answer we haven’t mention. If you want to find out which one, stay tuned to Clémence next video!
Thanks for your attention!
Bye for now 👋
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