What is the difference between treaty and facultative reinsurance?

Treaty covers a defined class of risks automatically once the risk fits the wording. Facultative is placed risk by risk. Treaty is a portfolio contract. Facultative is a submission, quote, and certificate.

Operations fail when teams treat a facultative inbox like a treaty bordereau, or try to force an oversized risk into a treaty that never contemplated it. Software that cannot tell those workflows apart will extract the wrong fields and post the wrong contract.

Treaty: standing capacity

Treaty reinsurance is automatic capacity. The reinsurer agrees in advance to accept risks that meet class, territory, and exclusions. The cedent does not offer each policy for a separate yes. Quota share, surplus, and excess of loss are still that idea, with different cession mechanics.

The ops object is the wording plus the bordereaux. Premium, claims, and commission files have to map to the same year and the same definitions. A special acceptance is a document, not a mailbox yes. A risk thrown out of the treaty and offered as a pack is two files: the treaty exception list and the facultative placement. Do not ask one spreadsheet to explain both.

Facultative: optional on both sides

Facultative reinsurance is optional for the cedent to offer and for the reinsurer to accept. Brokers assemble a pack: slip or MRC, SOV, loss history, wording excerpts, source spans, and a chase list. Reinsurers triage, quote, or decline. There is no standing cession just because last year's certificate existed.

The placing instrument is the facultative slip. The certificate is evidence of cover after lines are written. Treating an unsigned slip as if it were a treaty bordereau row is how you book capacity that was never bound.

Two inboxes, two completeness tests

A treaty file is complete when rows can be tested against cited attachment, class, territory, period, and basis. A facultative pack is complete when an underwriter can price without guessing: named insured, period, limits, TIV with both slip and SOV visible when they disagree, loss history with an as-at date, governing excerpts, and a chase list for what is still missing.

Mixing those tests is the usual failure. A facultative occurrence limit discussed as a treaty layer. A treaty bordereau asked to explain a single-location SOV. One folder, two pack types, one technician who "knows what we meant." Name the pack type on the first screen.

Worked example: ACME Construction Ltd

Fictional walkthrough: ACME Construction Ltd, acme.example, property. If the risk fits a property quota share, it cedes automatically and appears on the treaty premium bordereau. If it is too large, or the occupancy is outside class, it is offered facultative. The facultative pack is Slip.pdf, SOV.xlsx, a loss run, and whatever wording excerpts govern. Slip page 2 states USD 10,000,000 any one occurrence and TIV USD 42,000,000. The SOV totals USD 47,100,000 because a warehouse was added after the slip was typed. Hours clause is absent.

That facultative pack is not a treaty bordereaux problem. Posting ACME Construction Ltd onto the quota-share file because the name matched last quarter's extract is how you cede a risk the treaty never accepted, then argue the recovery at the loss. Keep the treaty automatic. Keep the facultative optional. Extract each against its own template. Humans still decide whether the warehouse is on cover and whether the slip gets amended. Software flags the conflict and leaves the two TIVs visible.