A document formalizing a facultative reinsurance cession.

The reinsurance of part or all of (the insurance provided by) a single policy, with separate negotiation for each cession. The word "facultative" connotes that both the primary insurer and the reinsurer 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 treaty reinsurance).

A reinsurance contract under which the ceding company may or may not cede exposures or risks of a defined class to the reinsurer which is obligated to accept if ceded.

A reinsurance contract under which the ceding company has the option to cede and the reinsurer has the option to accept or decline individual risks. The contract describes how individual facultative reinsurances shall be handled.

A purpose of reinsurance in some cases, i.e., whenever the reinsurer relieves the primary company of all or part of the company's responsibility for carrying an unearned premium reserve and the reinsurer allows a ceding commission to the primary company. Because the cash or other statutorily recognized assets being transferred (causing a change in assets) are less than the unearned premium reserve change (causing a change in liabilities), the primary company's policyholder surplus is increased by the amount of the reinsurance commission allowance.

The amount of loss sustained by the reinsured before the liability of the excess of loss reinsurer attaches, often referred to as Net Retention [see Attachment Point].

A term exclusive to pro rata reinsurance treaties which defines the amount of each cession as the amount of gross (policy) liability which exceeds or is "surplus" to, an agreed net retention up to the limit of (reinsurance) liability. Often a maximum net retention is specified in the treaty, with the primary 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. Larger policy surpluses are termed "second," "third," and so on, each being the amount of reinsurance afforded once the prior surplus reinsurance capacity plus the true net retention have been exceeded [see Surplus Reinsurance].

A stated commission percentage, payable by the reinsurer to the reinsured, which is not subject to further adjustment under a profit sharing provision. Common in pro rata facultative reinsurance.

1) A fixed rate not subject to any subsequent adjustment.

2) A reinsurance premium rate applicable to the entire premium income derived by the ceding company from the business ceded to the reinsurer (as distinguished from a rate applicable to excess limits).

A concept inherent in any reinsurance relationship which, when expressed in an agreement, generally runs to a statement that the reinsurer "shall follow the fortunes of the ceding company in all matters falling under this Agreement" or shall do so "...in all respects as if being a party to the insurance," or similar language. Expressed or not, the concept speaks to a relationship under which the reinsured's duty -- to treat reinsured policy rights and obligations as if there were no reinsurance -- is extended into a right. This right is not open-ended: it cannot carry a reinsurer outside its agreements; neither is it fixed. Rather, it rests on mutual trust within the circumstances of each case. Accordingly, some reinsurers avoid "following the fortunes" clauses in their agreements, while those in use are normally found in pro rata treaties where the sharing nature of cessions makes proper implementation reasonably evident and self-controlling.

Historically, the "follow the fortunes" clause was designed to deal with "errors and omissions," particularly in the case of inadvertent omission by the ceding company of a specific risk on a bordereau, intending to permit the ceding company to include the risk on a bordereau upon discovery of the oversight with retroactive reinsurance. However, the courts have held that under the "follow the fortunes" language of a reinsurance treaty, the reinsurer adopts the language of the primary policy, and thus a third party creditor of the primary insurer has a right of action against the reinsurer under a reinsurance contract. Such a holding is an exception to the general rule of law applicable to reinsurance agreements that such agreements operate solely between the reinsured and the reinsurer and create no privity between the reinsurer and any third party, and afford no right of action by any third party against the reinsurer on the reinsurance agreement. The historical objective of the clause can be achieved by inserting an "errors and omissions" clause in any reinsurance agreement which is not fully automatic. Neither a "follow the fortunes" nor "errors and omissions" clause is necessary in an automatic reinsurance agreement.

A reinsurer which follows the lead reinsurer on a cover being placed, accepting or rejecting the terms as presented.

A U.S. reinsurer conducting business in a state other than its domiciliary state, where it is known as a domestic company (as opposed to an alien reinsurer: one domiciled outside the U.S. but conducting business within the U.S.).

A contractual provision, common in hail insurance but also used elsewhere, stating that no loss is payable until the loss exceeds a certain amount but, when that amount is exceeded, then the whole loss is paid.

An arrangement whereby one insurer issues a policy on a risk for and at the request of one or more other insurers with the intent of passing the entire risk by way of reinsurance to the other insurer(s). Such an arrangement may be illegal if the purpose is to frustrate regulatory requirements.

The holding by a ceding company of funds representing the unearned premium reserve or the outstanding loss reserve applied to the business it cedes to a reinsurer.