By Gareth Baines, PARTNER RISK
Facultative reinsurance (Fac) divides opinion in our industry, and it always has. Some underwriters treat it as an essential tool for managing exposure. Others see it as a last resort for reinsurance support, as most if not all accepted risks should be written to net and treaty (N&T) reinsurance. I’ve heard it called both a strategic lever and a crutch, sometimes in the same conversation.
The truth? It’s neither and both. When an underwriter (You) applies Fac with discipline and clear intent, it stops being a contingency measure and becomes something more useful: a precision instrument for achieving portfolio balance, maintaining market presence, and protecting the portfolio of policies you’ve worked hard to build.
At PARTNER RISK, my position has always been straightforward. Fac shouldn’t be discouraged when it’s properly structured. It should be governed. There’s a difference. Exposure management isn’t about rejecting risk outright, nor is it about accepting risk outright. It’s about optimising risk retention to N&T. The right facultative reinsurance policy lets you manage volatility while continuing to serve your markets effectively, and that matters when you’re trying to build something sustainable.
What follows are the principles that define when Fac “fits the frame”, and why I believe it remains a legitimate component of intelligent underwriting strategy.
De-Risking Temporarily Deteriorated Accounts
Insurance markets move in cycles. Everyone knows this, but we don’t always know how to handle a soft market compared to a hard market. A risk that performs consistently over several years can deteriorate in the short term due to, for example, risk management practices or operational changes at the insured’s end. When this happens, the Insurer’s temptation is to walk away: Cut the line, move on, protect the treaty.
But that’s often counterproductive. Facultative reinsurance gives you another option: reduce your exposure to the N&T position while preserving the client relationship and continuity of cover. You’re not abandoning the account, you’re managing it through a rough patch.
By ceding part of the risk facultatively, you maintain participation on risks you expect to improve in the near term or at least at the next renewal date. This is tactical de-risking. It protects treaty integrity and gives you time for the underlying exposure to stabilise. It’s defensive, yes, but it’s not reactionary. It reflects measured judgement in circumstances where patience, rather than withdrawal, serves your longer-term interest.
I’ve seen underwriters treat deterioration as a binary event: either the account is good or it isn’t. That’s too rigid. Markets change, businesses adapt, and sometimes the best decision is to stay engaged at a reduced level to N&T rather than exit entirely and tarnish if not lose the relationship with the retail broker.
Preserving Market Relevance
The insurance market runs on consistency and trust. If you reduce participation or decline renewals on technical grounds too often, you erode both. The problem is that N&T capacity doesn’t always align with what the market expects from you. N&T Line sheets tighten, risk quality assessments change, and suddenly you’re constrained in classes where you’ve historically been active.
Fac provides a route to remain competitive without breaching underwriting discipline. In practical terms, it lets you maintain visibility and relevance in classes where your appetite might otherwise appear limited. You can maintain or even increase gross participation whilst optimising risk retention to N&T. You stay engaged at the renewal table, and signal to brokers that you are still a committed reliable participant. Grossing up participation may also reduce the administrative burden for brokers by potentially reducing the number of co-insurers participating on a risk.
Even though they are not party to reinsurance contracts, retail brokers understand capacity constraints. What they value is the willingness to find structured solutions rather than abrupt exits or capacity changes that leave them scrambling at renewal.
Maintaining Broker Relationships
For many insurers, the most delicate balance lies in managing broker expectations, and this is where things can get uncomfortable when markets shift. A sudden withdrawal or reduction of gross participation at renewal strains longstanding relationships, even when it’s technically justified. You know it, the broker knows it, but it still damages trust.
Viable Fac placements allow you to sustain your gross line while adjusting net exposure behind the scenes. The broker sees continuity, you get the risk profile you need, and the market doesn’t interpret your actions as a signal of declining appetite.
This approach prevents unnecessary disruption. It reinforces the broker’s confidence that you’re a stable and solution-oriented partner, not someone who disappears when conditions tighten. The objective isn’t to mask capacity limits, it’s to manage them responsibly so that commercial relationships remain intact while you recalibrate the retention to N&T as needed.
And let’s be honest: in a relationship-driven market, how you manage change matters as much as what you change.
Supporting Lead-Line Positions
Here’s where Fac becomes genuinely strategic rather than defensive. By deploying higher capacity to secure lead-line status, Insurers gain influence over policy wordings, pricing structures, and claims management processes. All of these matter in competitive environments where leadership positions shape placement outcomes.
Lead-line positions at PARTNER RISK automatically come with the PayBack undertaking. Viable Fac enables an Insurer to gross up participation to achieve lead line position. It’s one of the smarter uses of Fac reinsurance. It transforms Fac from a defensive manoeuvre into a proactive tool for leadership in placement structures.
Cushioning Earnings Under Premium Pressure
Renewal seasons rarely pass without pressure on rates. When markets soften, the immediate reaction by Insurers is often to increase participation to preserve top line premium income across the board. But there’s a more measured approach at renewal; scale back the expiring facultative support in order to avoid or reduce the negative impact on potential earnings to N&T.
Fac provides a buffer to protect premium generation to N&T. In soft markets, that flexibility can mean the difference between meeting annual EPI targets and losing N&T ground you spent years gaining. But the success of this approach depends entirely on the viability of Fac as well as the governance around it. The Fac limit, the approval process, and the quality of the reinsurers and brokers involved must all be clearly defined. Without these controls, Fac placements can be costly.
Premium pressure is a recurring feature of the underwriting cycle, not an anomaly. Fac provides a release valve that lets you manage N&T exposure without destabilising relationships or distorting portfolio composition. It’s not about avoiding tough decisions, it’s about making them in a way that doesn’t create unnecessary collateral damage.
Managing frequency-driven exposures
Certain risk classes carry high-frequency-low-severity claims patterns that challenge traditional retention structures. Workers’ compensation in some jurisdictions, certain motor portfolios, property with high attritional loss activity. You know the ones. Whilst it increases the administrative burden on insurers, in these cases, using Fac for the primary layer, with N&T participation on excess layers, creates a more balanced solution.
This technique is particularly relevant for risks that remain attractive from an appetite, relationship and pricing standpoint but require selective risk transfer for capital efficiency. It reflects an evolving approach to exposure management, one that values structure over rigidity. You retain meaningful participation where it adds value, while transferring exposure where frequency patterns would otherwise erode profitability.
The discipline here lies in understanding where your capital is best deployed. Not all layers of risk offer the same risk-adjusted return, and pretending they do is either naive or wilfully ignorant. Fac allows you to participate selectively, preserving relationships while optimising capital allocation.
The role of arbitrage
Arbitrage in the facultative context gets misunderstood, often deliberately. Critics reduce it to a temporary pricing gap between retail and wholesale markets, assuming such opportunities are fleeting and therefore insignificant. While it’s true that efficient markets close gaps over short time periods, pricing arbitrage in reinsurance serves a broader function than simple profit-taking.
When wholesale rates are more competitive, facultative placements can achieve risk transfer at a lower cost while maintaining gross market share. The margin you gain isn’t purely opportunistic. It represents the potential benefit of sound capital allocation and protection of treaty layers. Even if the opportunity is short-term, it can preserve relationships, stabilise underwriting portfolios, and maintain the momentum of growth during periods when direct market pricing is under pressure.
Arbitrage, when governed properly, isn’t about exploiting inefficiencies. It’s about deploying capital where it achieves the best outcome for all parties involved.
A governance-based approach
The future of facultative reinsurance doesn’t lie in prohibition, it lies in sound policy. A sensible Fac framework should be endorsed at the underwriting level, for example through formal SODA (Schedule of Delegated Authority) approvals, rather than banned outright because someone once used it badly.
Parameters such as Fac limits (for example, 100% x N&T), referral rules for exceptions, and requirements for approved reinsurers and brokers establish the guardrails within which underwriters can operate confidently. Such governance pre-supposes that every facultative placement is commercially viable, strategically justified, and aligned with an Insurer’s overall exposure philosophy.
Without governance, Fac becomes a crutch. With it, Fac becomes a tool. The distinction matters. Clear policies ensure that every facultative placement gets scrutinised, approved by the right authority, and aligned with the insurer’s broader risk appetite. This isn’t bureaucracy for its own sake. It’s discipline that protects all parties concerned.
A tool for growth, not retreat
When used reactively, Fac looks like a symptom of strain. When used strategically, it becomes an enabler of profitable expansion. Every insurer faces moments when capacity, competition, or market pressure require agility that standard structures can’t provide. Facultative reinsurance, guided by policy and discipline, provides that flexibility without compromising principle.
The objective isn’t to chase every opportunity that presents itself. It’s to support a sustainable top line while protecting long-term relationships and treaty health. Arbitrage, de-risking, and differentiation aren’t contradictory to prudence. They’re expressions of it, provided each decision is commercially sound and transparently governed.
I’ve seen underwriters shy away from Fac out of fear that it signals weakness to the retail market or to senior management. This is a misreading of what weakness actually looks like. What signals weakness is the inability to manage exposure dynamically. What signals strength is the ability to deploy the right tool at the right time, within the right framework, and to explain why you did it.
The final word
Exposure management is as much an art as it is a science, and anyone who tells you otherwise hasn’t been doing it long enough. The capacity we choose, whether facultative, treaty, or net, reflects not only our risk appetite but our underwriting philosophy and how we see our role in the market.
Fac is not a shortcut. It’s a scalpel. Used wisely, it sharpens competitiveness and preserves capital. Used carelessly, it creates the illusion of capacity which does not last.
At PARTNER RISK, I advocate for balance: use facultative reinsurance where it adds value, regulate it where it could mislead, and recognise it as part of the broader craft of responsible underwriting. When Fac fits the frame, it strengthens it. When it doesn’t, have the discipline to walk away.