When is facultative reinsurance used as opposed to treaty reinsurance?

Question

For instance in property reinsurance is treaty the best to use? And in casualty of liability reinsurance is facultative the best to use?

Answer 1

It would depend on the type of risks to which the Re is exposed.

Treaty might be negotiated to insure an oil tanker; facultative might be used if it's a number of smaller, similar risks. No one form is superior to the other - it's more so the type of risks (and size) involved.

If most liability claims can be expected to be smaller, more measurable, and similar in size and severity, then fac reinsurance might be perfect. If the claims could be irregular, large, infrequent, or tougher to underwrite, then probably treaty.

Fac is sometimes combined with treaty for risks that exceed a certain limit - underwriters call up the Re if the coverage amount exceeds, say, two million; risks under that amount are fac, over 2 million, treaty. (Or the reverse - treaty for a ton of small risks, fac for just a few big risks).

Both types have their advantages and disadvantages. The exposures to the Re and to the insurer will determine what's used, along with what's easiest, cheapest, soundest, most efficient, etc, for both the insurer and for the re.