THE COMPANY

Reinsurance
Terms

  • Facultative Certificate of Reinsurance

    A document formalizing a facultative reinsurance placement.

  • Facultative Reinsurance

    In pro rata reinsurance, the reinsurance of part or all of the insurance provided by a single policy, with separate negotiation for each policy cession of insurance - for sharing liability, premium, and loss. In excess of loss reinsurance, the reinsurance of each policy, with separate negotiation for each - for indemnity of loss in excess of the reinsured's loss retention. The word "facultative" connotes that both the primary insurer and the reinsurer usually 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 most treaty reinsurance).

  • Facultative Semi-Obligatory Treaty

    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.

  • Facultative Treaty

    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.

  • Financing Function

    A purpose of reinsurance in some cases, e.g., 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 need for policyholder surplus relief is created when an insurance company wishes to write more policies, or larger policies, or both, then its policyholder surplus (assets minus liabilities) can finance. Put another way, the initial cost of writing primary insurance policies (which must be expended immediately) exceed the initial premium income (which is not available to offset costs until it is earned over the policy period, usually twelve months as required by law), and the company is therefore limited in its policy writings by the amount of its net worth, or policy-holder surplus.

  • First Loss Retention

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

  • First Surplus Treaty

    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 liability 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 Share Reinsurance.

  • Flat Commission

    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.

  • Flat Rate

    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).
  • Follow the Fortunes

    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 agreement, 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 rein-surer 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.

  • Following Reinsurer

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

  • Foreign Reinsurer

    A U.S. reinsurer conducting business in a state other than its domiciliary state, where in the domiciliary state the reinsurer 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.).

  • Franchise Covers

    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, the whole loss is paid.

  • Fronting

    An arrangement whereby one licensed insurer issues a policy on a risk for and at the request of one or more other unlicensed 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.

  • Funded Cover

    A reinsurance contract under which the re-insured company pays a higher than normal premium intended to build a fund from which to pay expected losses. Because the higher premium reduces the reinsurer's risk (i.e., that losses will exceed the premium), the reinsurer agrees to accept a reduced reinsurance margin. All of the premium less the reinsurance charge will be returned to the ceding company at some time in the future as loss payments, returned premiums, or contingent comissions.

  • Funds Held Account (or Funds Withheld)

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