Article

Treaty reinsurance and facultative reinsurance are the two core ways captives interface with third‑party risk capital; for a captive program, they determine how efficiently you can scale limits, manage volatility, and align reinsurer underwriting with your own.​

Core definitions

• Treaty reinsurance: A standing, automatic contract under which the reinsurer assumes a defined portfolio (class/program) of risks, subject to pre‑negotiated terms, limits, and exclusions; individual policies attaching within scope are ceded without separate negotiation.​
• Facultative reinsurance: A per‑risk (or defined package) placement where each submission is individually underwritten, priced, and either accepted or declined by the reinsurer; there is no obligation for the reinsurer to accept any given risk.​

Both can be written on pro rata or excess‑of‑loss bases, with proportional treaties sharing premium and loss by percentage and non‑proportional structures attaching above a captive’s retention.​

Treaty vs facultative mechanics

• Treaty structures (quota share, surplus, working/excess layers, aggregate XoL) provide automatic capacity and operational efficiency but push reinsurers to rely heavily on the cedent’s underwriting discipline and governance rather than case‑by‑case review.​
• Facultative placements are used where treaty capacity is unavailable or insufficient, or where an individual risk deviates materially from the normal portfolio profile (size, hazard, jurisdiction, coverage nuance).​
• Management cost and frictional expense are typically higher for facultative because each risk requires separate marketing, underwriting, and documentation, while treaty administration cost sits more in ongoing bordereaux, audits, and reporting.​

Captive insurance applications

• Direct‑writing captives often purchase excess‑of‑loss or quota share treaties above a net retention to stabilize results and meet regulatory/parent risk appetite; e.g., captive retains first 1M and cedes higher layers to unaffiliated reinsurers.​
• In fronted programs, the captive usually acts as reinsurer of the licensed carrier (front), assuming a defined share of the policy limits; additional third‑party treaty or facultative support then backstops the captive above its desired net.​
• Captives frequently add facultative support for outlier locations (high‑CAT property, industrial/process risks) or niche liability hazards that exceed treaty sublimits or breach underwriting criteria.​

Treaty and facultative in group captives

• In a group captive a reinsurer may grant treaty capacity and appoint the captive to underwrite within agreed guidelines, with automatic reinsurance attaching above the captive’s or facility’s retention on all qualifying policies.​
• Treaty is typically used to support scalable, homogeneous program business (GL/AL, mid‑market property, workers’ comp), while facultative sits on top for limit top‑ups, special hazards, or insured‑driven manuscripted coverage.​
• Regulatory and collateral considerations (particularly where the captive is offshore or unlicensed) drive reinsurance structure; fronting carriers often require robust treaty protection and substantial collateral from captive reinsurers to protect their balance sheets and RBC.​

Strategic design considerations for captives

• Use treaty where: the portfolio is reasonably predictable and homogeneous; scale and admin efficiency matter; reinsurers are comfortable delegating underwriting to the captive with audits and guidelines.​
• Use facultative where: individual accounts materially skew severity, jurisdictional, or aggregation profile; CAT or clash exposures exceed treaty capacity; or reinsurers want case‑specific control over pricing and terms.​

For long‑term profitability, optimal captive programs blend a core treaty tower (pro rata + XoL, specific and aggregate) with targeted facultative buys, minimizing leakage on routine risks while surgically offloading peak exposures and protecting captive surplus.

Captives.Insure is positioned to deliver turn‑key captive programs that integrate fronting, reinsurance, and collateral solutions into a coherent, scalable structure aligned with stakeholders’ profitability objectives. Captives.Insure can design and manage end‑to‑end captive workflows—from program design and layer architecture through reinsurance placement, modeling, and ongoing performance monitoring—so that sponsors, fronting carriers, and reinsurers operate on a unified framework with clear alignment of risk, capital, and returns.