Reinsurance FAQs

• Facultative: Case-by-case, risk-specific, individually negotiated.
• Treaty: Automatic coverage for a defined book of business. Facultative provides flexibility where treaties exclude or limit certain risks.

The cedant still handles claims with the policyholder, but reinsurers typically require direct involvement or consent in large facultative losses. Facultative markets often have stricter claims control clauses than treaties.

They’re individually negotiated based on:

• Risk quality (construction, protections, location).
  
• Loss experience.
  
• Market capacity and appetite.
  
• Current reinsurance cycle (hard vs soft market).
  

Facultative sits “over” or “outside” the treaty. A typical example: a treaty covers up to R500m per risk, but a petrochemical plant requires R2bn in cover. Facultative capacity bridges the gap. Treaties usually require notification when facultative is purchased.

• Flood and storm exposure: High-value industrial facilities in KwaZulu-Natal and Western Cape increasingly need facultative flood capacity.
  
• Solar farms: Rapid growth in renewable energy projects requires facultative cover for fire, hail, and theft exposures.
  
• Cat aggregation: Facultative reinsurers are more cautious about clusters of risks in flood-prone or hail-prone zones.

• Rand depreciation: Premiums are often denominated in hard currencies (USD/EUR), increasing costs.
  
• Inflation: Higher replacement values push up sums insured and facultative capacity requirements.
  
• Load shedding: Increases fire and machinery breakdown claims, which reinsurers factor into pricing.

Often via subscription: multiple reinsurers may each take a percentage line on a large risk, coordinated through an intermediary.

Emerging exposures — such as liability from AI errors or cyberattacks on critical infrastructure — are often carved out of treaties. Facultative markets may be the only way to secure tailored protection.

• Increased scrutiny of flood-exposed industrial sites.
  
• Tight capacity for large energy and petrochemical risks.
  
• Growing use of facultative for renewables (solar, wind farms).
  
• Heightened focus on cyber/AI exclusions, with facultative cover as a negotiation tool.
  
• Pricing hardening after consecutive local catastrophe events (e.g., KZN 2022 floods, 2023 Western Cape floods).

• Proportional facultative: The reinsurer takes a share of premiums and losses.
  
• Non-proportional facultative (excess of loss): The reinsurer pays when a loss exceeds an agreed amount on that risk.

• Detailed underwriting slips or schedules.
  
• Engineering reports and risk surveys.
  
• Loss history for the specific risk and sector.
  
• Sums insured and breakdown of values (e.g., buildings, machinery, stock, BI).
  
• Catastrophe modelling, where applicable.

Facultative reinsurance is coverage arranged for an individual risk (or small portfolio of risks) that sits outside the scope of a treaty. The reinsurer reviews and decides whether to accept or decline each submission.

• Market access: Bringing South African risks to international facultative reinsurers with appetite.
  
• Negotiation: Securing competitive pricing and capacity in a tight market.
  
• Speed: Facilitating quick placements for time-sensitive submissions.
  
• Advisory: Helping UMAs/brokers position complex risks effectively with underwriters.
  

South Africa has significant concentrations of high-value risks — mining, petrochemical, energy, ports, and large infrastructure. Facultative reinsurance provides the additional layers of protection needed beyond treaty limits.

• Very large risks that exceed treaty limits (e.g., power plants, mines, refineries).
  
• Unusual or hazardous risks (chemical storage, aviation, ports).
  
• Classes of business excluded by treaties.
  
• Risks where additional capacity is required on top of treaty protection.
  

• Expertise in complex risks: Energy, mining, renewables, and industrial facilities.
  
• Global reach: Access to facultative reinsurers in London, Europe, Asia, and the Middle East.
  
• Local insight: Understanding South African infrastructure challenges and regulatory environment.
  
• Holistic strategy: Aligning facultative with treaty to create seamless protection.

Proportional: Share of premium and claims (with ceding commission). Non-proportional: Reinsurer only pays when claims exceed a retention.

Pricing depends on:

• Loss history and credibility.
  
• Exposure data (by peril and geography).
  
• Catastrophe modelling.
  
• Market cycle and reinsurer appetite.
  
• Treaty structure, terms and conditions

AI introduces professional indemnity and liability exposures that are hard to model. Reinsurers are pressing cedants to clarify wordings, exclusions, and claims experience. For UMAs writing tech or liability business, treaty partners will ask how AI-related risks are being assessed.

Treaty: Blanket coverage for a defined portfolio, automatic acceptance, long-term relationship. Facultative: Case-by-case reinsurance for unusual or large risks. Both are essential tools, but treaties underpin an insurer’s core risk transfer strategy.

 Reinsurance reduces insurers’ required capital under the Prudential Authority framework. However, the quality of the reinsurer (credit rating, security) is critical.

Rooftop and utility-scale solar farms are vulnerable to hail, wind, and fire. Treaty programmes increasingly carve out solar exposures or require detailed accumulation mapping. Some reinsurers seek parametric hail or solar irradiation covers to manage these risks.

Typically annually. In South Africa, renewals align with global cycles (1 January, 1 July), though some niche treaties have bespoke dates.

They allow cedants to restore treaty cover after a loss event, usually for an additional premium.

Quota Share: A fixed percentage of every risk is shared. Surplus: The cedant retains up to a set line, ceding the rest proportionally. Excess of Loss (XoL): The reinsurer pays losses above a retention. Stop Loss: Protects the cedant against aggregate losses in a given year.

Inflation drives up repair/replacement costs, making historical loss data less predictive. Currency depreciation affects reinsurance premiums (often denominated in USD or EUR). Load shedding increases machinery breakdown, fire, and BI claims. All of these affect treaty pricing, retentions, and reinsurer appetite.

Losses above the treaty cap remain the cedant’s responsibility, unless additional layers are purchased. That’s why programme design (retention, layering, reinstatements) is crucial.

• 5–10 years of loss data.
  
• Premium and exposure breakdowns.
  
• Accumulation control procedures.
  
• Underwriting guidelines and pricing logic.
  
• Portfolio management practices.
  
• Loss ratio and claims information.

The allowance reinsurers pay back to cedants on proportional treaties to cover acquisition and admin costs.

Treaty reinsurance is a standing agreement where a reinsurer automatically takes on a share of a cedant’s book of business, rather than underwriting risks one at a time. It provides certainty, efficiency, and capital relief.

Climate volatility: Floods, droughts, and hailstorms have increased frequency and severity. Energy transition: Growth in solar installations creates new aggregation risks (hail, theft, fire). AI and cyber: Emerging liability exposures from algorithmic failures and data breaches. Market volatility: Inflation, currency swings, and load shedding all influence claim costs and portfolio stability. Infrastructure weakness: Ageing stormwater and power grids amplify catastrophe risk, now linked to litigation.

• Access to global markets: Securing reinsurers with appetite for South African risks.
  
• Programme structuring: Advising on proportional vs XoL, parametric add-ons, and aggregate protections.
  
• Data positioning: Helping cedants present their portfolios credibly to global reinsurers.
  
• Negotiation: Optimising pricing and ceding commissions.
  
• Advisory: Translating international market trends (AI, climate, volatility) into local relevance.