Facultative reinsurance is negotiated separately for each insurance contract that is to be reinsured. The flexibility of facultative reinsurance allows many ceding insurers to reinsure hazardous risks not covered by ongoing treaty arrangements, thereby reducing the insurer's liability in certain high-risk areas. Facultative reinsurance also allows the primary insurers to obtain the reinsurer's advice on doubtful risks. This type of reinsurance contract can be in pro-rata form (a percentage-sharing plan for both premiums and losses) or excess of loss (reinsurer accepts certain losses past a pre-set breakpoint).
| Advantages | Disadvantages | ||
| Flexibility | - The ability to arrange a reinsurance contract to fit any particular case. | Uncertainty | - The ceding insurer cannot plan in advance as it does not know whether the reinsurer will accept the risk. |
| Stability | - Stability in the operations of the insurer as the large losses can be transferred to the reinsurer. | Delays for the Insurer | - Because the policy will not be issued unless and until the reinsurance is obtained, it leads to delay. |
| More business | - Increases the insurer's capacity to take on larger amounts of insurance business. | Unreliability | - Bad market conditions and poor loss outcomes can weaken the reinsurance market, making it difficult for the insurer to obtain reinsurance. |
Source: http://www.investopedia.com/articles/pf/08/reinsurance.asp
