Treaty and Facultative Reinsurance
Link I posted in a previous post Reinsurance is used as risk management in Project Finance. There are 2 main types of Reinsurance Treaty and Facultative.
Before let me cover some basic terms. Reinsurance is used by insurance companies as a means of risk management where a primary insurance company sells a policy or policies to a reinsurance company. This is used to prevent risk, move out of risky markets, protect the primary’s credit ranking and stock price, and allow the coverage of lager risky projects.
Primary Insurer: The company that originally wrote the insurance policy.
Reinsurer: The company that buys the policy from the Primary Insurer.
Treaty Reinsurance: An agreement in advance where all the lose exposures are cover that fall within the Treaty. It is a portfolio of loses. So this can be the whole construction process of a project. Lets say that a primary insurer covers the construction process for a nuclear power plant in Japan, but feels that Japan is too risk and wants to cover all of its polices for the project. Treaty reinsurance allows this so that not one insurance company takes the whole risk, but Two or more cover the losses (you can have more than one reinsurance company cover the losses).
Facultative Reinsurance: This is a separate agreement that the primary insurer wants covered. This covers one aspect. Using the Japan example above lets now say that the primary insurance company wants to cover the transportation of material rather than the whole construction process. Facultative Reinsurance will be used which just covers that single part.
If you would like to learn more about reinsurance I suggest buying the book Reinsurance Principles and Practices 1st Edition by Connor M. Harrison