Insurance policies can be quite difficult to understand at times, and it gets even more difficult with facultative reinsurance. Before understanding what facultative reinsurance is, you must get a grip on what reinsurance is. Insurance policies are used to guarantee a contract between two parties. These two parties can be borrowers and lenders, investors and companies and many other types of transactions. For example, those who purchase a home through a mortgage will need to provide an insurance policy that covers the contract in the event the borrower defaults on their loan. Reinsurance takes that a step further and it is considered insurance for insurance.
Insurance policies are typically negotiated at a higher level that most insurance policy holders are unaware of. Facultative reinsurance usually deals with larger contracts and bigger insurance policies. Small insurance policies like automobile insurance don’t require the process of facultative reinsurance. However, larger investments and other larger insurance policies that cover a significant amount of value will undergo the facultative reinsurance process. Two parties will essentially evaluate all risks that are associated with insuring a certain individual or property. In fact, risk management teams are used in order to obtain a risk assessment that is accurate in all cases.
Special policies that require unique and tricky coverage plans will require a risk management team to asses all the risks possible with insuring the individual or contract. Once a proper assessment has been established, the two parties will negotiate a price. This process helps companies and insurance issuers to fully customize certain policies in order to meet the needs of many different situations. Offer insurance by itself can be considered a risk and many times insurance is needed for the insurance that is being provided. The assessments that are done will effectively create a solution that will dictate the amount the insurance policy will cost.
Facultative reinsurance is considered a means of reducing risks when issuing specialized insurance policies for larger valued individuals or property. In other words, a certain amount of coverage will be needed to protect a certain amount of risks. If the coverage isn’t enough to cover assets or the individual, it will not be in the best interest of the insurance company to issue insurance. However, a solution can be created by using facultative reinsurance that properly assesses the situation that results in a creative solution. This process is highly unlikely for normal everyday people who are looking for typical insurance.
This process only deals with larger risks, larger value and larger possibilities that impose many different possible scenarios that can threaten the insurance agency's business. Facultative reinsurance will provide risk management and reduce the overall amount of possible risks to the point where the insurance company will be able to provide insurance for specialized situations. Another way to look at facultative reinsurance is where the risk is being transferred. Risk is being transferred from the insurance company to the reinsurance company. Basically, it is a system of insurance companies providing insurance for other insurance companies.
One example of where facultative reinsurance is used deals with an insurance company going bankrupt. In order for the insurance company to provide continued coverage to their clients during a bankruptcy, the insurance company will purchase insurance themselves from a facultative reinsurance company. The reinsurance company will continue to cover the client’s policies in the event the original insurance company cedes or fails to provide coverage for their clients. Many larger insurance companies use facultative reinsurance for a number of possible threats that could hinder their ability to conduct business in the future. The average citizen does not have to deal with facultative reinsurance, although they might be covered by this type of insurance and not even know it.