Category: Reinsurance fundamentals · Reviewed by Matt Bartlett, Director · Founder · Last reviewed 2026-06-05
Auto facultative (also called facultative obligatory or ‘fac-ob’) is a hybrid reinsurance arrangement in which the cedant retains the option to cede individual risks of a defined class, but the reinsurer is obliged in advance to accept any cession that the cedant chooses to make within the agreed parameters. It combines the cession flexibility of facultative with the placement efficiency of treaty.
Category: Reinsurance fundamentals Also known as: facultative obligatory, fac-ob, auto-fac Related concepts: facultative reinsurance, treaty reinsurance
Under an auto facultative arrangement the reinsurer pre-commits to a line on any individual risk that the cedant chooses to cede, subject to defined acceptance criteria — typically class of business, territorial scope, individual risk size, maximum cession per risk, exclusions and aggregate annual capacity. The cedant decides whether to cede each risk based on its own underwriting and capacity needs.
The arrangement is sometimes referred to as a ‘fac binder’ or ‘open cover’ and is most commonly used for niche or specialist classes where the cedant wishes to retain underwriting discretion but benefits from automatic reinsurance availability.
An auto facultative arrangement is a contract governed by general principles of English contract law and by the duty of fair presentation under the Insurance Act 2015 [1]. The reinsurer’s obligation is to accept cessions within the defined parameters; cessions outside the parameters require facultative placement.
In practice the auto fac arrangement is documented as a standing offer by the reinsurer to accept cessions on defined terms, with the cedant having the discretion to cede. The cedant maintains a bordereau of cessions made under the arrangement, settling premiums and commissions on a periodic basis (typically monthly or quarterly).
The arrangement is attractive to cedants because it provides committed capacity without the friction of individual placement. It is attractive to reinsurers as a means of building a specialist book without the high transaction cost of individual underwriting, particularly with a cedant whose underwriting and accounts the reinsurer trusts.
The downside for the reinsurer is adverse selection — the cedant chooses which risks to cede and which to retain net, and may cede only the less attractive risks. Auto fac arrangements typically contain anti-selection protection: minimum cession requirements, retention obligations on the cedant, or a ‘follow the original’ clause requiring the cedant to cede the same proportion of every risk.
An illustrative example: a UK marine cargo insurer maintains an auto facultative arrangement with three Lloyd’s syndicates providing aggregate capacity of £25m per voyage on cargoes exceeding £10m sum insured. Cessions are at original terms less a 5 per cent ceding commission, reported monthly on a bordereau, with a 20 per cent profit commission over three years.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-05. Next review: 2026-12-05.
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