Legal Definitions - facultative certificate

A facultative certificate refers to a specific type of reinsurance agreement. In this arrangement, an insurance company (known as the "ceding insurer") seeks to transfer a portion of the risk from a single, individualinsurance policy to another insurance company (the "reinsurer"). Unlike other forms of reinsurance that might cover an entire portfolio of policies, a facultative certificate is negotiated separately for each specific policy.

The key characteristic of a facultative certificate is that the reinsurer has the option or "faculty" to evaluate the particular risk and decide whether to accept or reject it, rather than being obligated to take on a predefined set of risks. This allows the reinsurer to conduct its own independent assessment of the unique policy's risk factors before committing to share the financial exposure.

• Example 1: Insuring a Unique, High-Value Property

  Imagine "CityScape Insurance" has underwritten a policy for a newly constructed, iconic skyscraper valued at several billion dollars. This represents an exceptionally high concentration of risk for a single asset. To manage its potential financial exposure in case of a catastrophic event, CityScape Insurance approaches "Global Reinsurers Inc." with a facultative certificate proposal for this specific skyscraper policy. Global Reinsurers Inc. then independently reviews all the details, including the building's advanced construction, fire suppression systems, and location-specific risks. Based on this individual assessment, Global Reinsurers Inc. decides whether to accept a portion of the risk for that single policy, and under what specific terms.

• Example 2: Covering a Complex, Specialized Project

  "InnovateSure Insurance" provides a comprehensive liability policy for a cutting-edge, experimental deep-sea drilling platform. The technology is novel, and the operational risks are largely unproven. Recognizing the unprecedented nature and potential severity of claims related to this single deep-sea drilling platform policy, InnovateSure Insurance opts for a facultative certificate. They approach "Oceanic Reinsurance Solutions" with the detailed underwriting information for this specific platform. Oceanic Reinsurance Solutions conducts a thorough review of the platform's design, safety protocols, crew training, and environmental impact assessments. They then exercise their "faculty" to decide whether to take on a share of the risk for this unique policy, allowing them to carefully manage their exposure to such specialized and high-risk ventures.

• Example 3: Managing Risk for a Major Entertainment Event

  "EventGuard Insurance" issues a liability policy for a massive, multi-day international music festival, covering potential claims from attendees, performers, and vendors. The festival involves complex logistics, a huge crowd, and significant potential for unforeseen incidents. Due to the unique and substantial liability associated with this single music festival policy, EventGuard Insurance decides to seek facultative reinsurance. They present the specific details of the festival's policy to "RiskShare Reinsurance." RiskShare Reinsurance evaluates the festival's safety plans, crowd management strategies, and historical incident data for similar events. They then have the discretion to accept or decline to reinsure a portion of this particular policy, based on their own risk appetite and assessment.