A primary insurance company receives an application for a highly unusual commercial property risk that exceeds its internal capacity. The company decides to utilize facultative reinsurance. Place the following steps in the correct sequence to illustrate how this specific risk transfer and policy issuance process occurs in practice.
- 1The primary insurer evaluates the new commercial application and determines the exposure exceeds its maximum retention limit.
- 2The primary insurer negotiates with a reinsurer to secure capacity specifically for this individual applicant.
- 3The reinsurer reviews the individual underwriting details and formally agrees to accept a portion of the risk.
- 4The primary insurer issues the final policy to the applicant, retaining sole privity of contract and full legal liability for claims.
Answer
The correct sequence is: 1) The primary insurer identifies the capacity shortage, 2) The primary insurer negotiates with a reinsurer for the specific risk, 3) The reinsurer accepts the risk, and 4) The primary insurer issues the policy while retaining full liability to the insured.
In facultative reinsurance, risks are handled on an individual, case-by-case basis. The sequence must begin with the primary insurer identifying a capacity need during underwriting. Next, the primary insurer approaches a reinsurer to negotiate terms for that specific exposure. The reinsurer evaluates and accepts the risk. Finally, with backing secured, the primary insurer issues the policy to the insured. Crucially, the primary insurer remains fully responsible to the policyholder, as the reinsurance transaction does not create any privity of contract between the insured and the reinsurer.
Step-by-Step Solution
Key Concept
Facultative Reinsurance Process and Privity of Contract