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Termsort icon Definition Randy Comment
Facultative Automatic

A reinsurance agreement whereby the reinsured may cede to a facultative reinsurer subject to a pre-agreed set of requirements, and the reinsurer must accept.  Subject risks are usually reported to the reinsurer via monthly or quarterly bordereau.

Facultative automatics exist in the grey area between traditional facultative reinsurance and treaty reinsurance.  A typical difference between Facultative Automatics and treaties is that Fac Autos do not usually respond to situations such as Extra Contractual Obligations and Excess Policy Limits.

Facultative Certificate

Short-form documentation of a facultative reinsurance transaction outlining terms, conditions, and reinsurer participation

Facultative Reinsurance

The reinsurance of part or all of the insurance provided by a single policy, with separate negotiation for each cession of reinsurance.  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).

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.

Flat Commission

A stated ceding ommission percentage, payable by the reinsurer to the reinsured, which is not subject to further adjustment under a profit-sharing provision or sliding scale arrangement.

Flat Rate

Pricing of excess of loss reinsurance by applying a fixed percentage to the subject premium.  Reinsurance premium is variable based on the increase or decrease in the premium of the portfolio, but the relationship of reinsurance premium to gross premium remains constant. 

 

Example:

$5,000,000 XS $2,500,000 Property Per Risk Excess of Loss priced at a flat rate of 7.5% of Gross Net Written Premium.  Based on a subject premium (GNWPI) of $60,000,000, the reinsurance premium would be  $4,500,000.

 

 

 

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.

Following Reinsurer (Following Market)

A reinsurer who authorizes participation based on another reinsurer's (the Lead) quoted terms and conditions.

Historically, the delineation between lead and following markets is most important in Lloyds of London, where the Lead reinsurer has additional responsibilities including contract review and claims review.  The terminology has evolved to differentiate those markets who typcially take large shares and set terms and conditions through quoting (Leads) and those reinsurers who authorize smaller shares, lack specific expertise in a line of business, or simply choose to take a non-quoting role in the placement (Following Markets)

 

 

Following Reinsurer (Following Market)

A reinsurer who authorizes participation based on another reinsurer's (the Lead) quoted terms and conditions.

 

Historically, the delineation between lead and following markets is most important in Lloyds of London, where the Lead reinsurer has additional responsibilities including contract review and claims review.  The terminology has evolved to differentiate those markets who typcially take large shares and set terms and conditions through quoting (Leads) and those reinsurers who authorize smaller shares, lack specific expertise in a line of business, or simply choose to take a non-quoting role in the placement (Following Markets)

 

 

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 Cover

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 an insurer issues a policy to an insured with the intent of passing all of the insured exposures to another party through reinsurance.  The fronting insurer normally receives a fee in consideration of the administration costs and credit risk associated with the transaction. 

Funds Withheld Basis

Reinsurance cession in which the ceding company does not actually remit premium to the reinsurer, but retains the premium in a separate account from which claims will be paid.  The primary purpose of structuring reinsurance on a Funds Withheld basis is to reduce or eliminate the need for an unauthorized reinsurer to post collateral.  Monies remaining in the Funds Withheld account after all subject policies have expired and all claims settled are remitted to the reinsurer.

 

Reinsurance placed on a Funds Withheld basis does not reduce or limit the ultimate exposure to the reinsurer, as it may be liable for amounts in excess of those held in the Funds Withheld account.