Facultative Reinsurance in Australia: 2025 Guide for Insurers

Australia’s insurance sector is evolving rapidly, with natural disasters, cyber threats, and complex commercial exposures becoming more frequent. Insurers are increasingly turning to facultative reinsurance to manage these risks in a targeted way. But what exactly is facultative reinsurance, and why is it gaining renewed attention in 2025?

What Is Facultative Reinsurance, and How Does It Work?

Facultative reinsurance is a type of reinsurance contract where an insurer (the cedant) transfers a specific risk or set of risks to a reinsurer. Unlike treaty reinsurance, which covers a broad portfolio of policies, facultative reinsurance is arranged on a case-by-case basis. This gives insurers the flexibility to seek external support for unusual, large, or complex risks that fall outside standard treaty arrangements.

• One-off cover: Facultative reinsurance is negotiated separately for each risk, making it ideal for high-value properties, infrastructure projects, or specialty liability policies.

• Tailored solutions: Terms, pricing, and coverage can be customised to the unique features of the risk in question.

• Underwriting scrutiny: Reinsurers assess each submission individually, often requiring detailed information and risk assessments.

For example, in 2024, several Australian insurers used facultative reinsurance to cover exposures related to major renewable energy installations in regional Queensland, where the risk profile was considered too volatile for standard treaty programs.

Why Is Facultative Reinsurance Important in 2025?

The Australian insurance market is facing a convergence of challenges in 2025:

• Climate volatility: Bushfires, floods, and cyclones are becoming more severe and less predictable, driving up claims costs and reinsurance demand.

• Cyber risk: With cyber insurance claims up 20% year-on-year, facultative reinsurance is increasingly used to manage exposure to large-scale data breaches and ransomware attacks.

• Regulatory changes: APRA’s 2025 update to capital adequacy standards means insurers must demonstrate robust risk transfer strategies, including evidence of effective reinsurance arrangements.

Facultative reinsurance offers a lifeline for insurers needing to offload parts of their risk portfolios that are too large or too complex to retain, especially as the market for traditional treaty reinsurance becomes tighter and more expensive. In 2025, several global reinsurers have launched digital platforms to streamline facultative placements, cutting response times and improving transparency for Australian cedants.

Benefits and Drawbacks: When Should Insurers Use Facultative Reinsurance?

Facultative reinsurance isn’t always the default choice—it’s most valuable when:

• The risk is non-standard, such as a one-of-a-kind infrastructure project or a high-rise building in a cyclone-prone area.

• The sum insured exceeds treaty capacity or falls outside existing treaty terms.

• The insurer wants more granular control over how and what is reinsured.

However, facultative reinsurance can be more expensive and time-consuming than treaty reinsurance, due to the need for detailed underwriting and negotiation. Insurers must weigh these costs against the benefits of enhanced risk transfer, especially in sectors facing higher volatility or regulatory scrutiny.

For instance, in the wake of the 2023–24 flooding in northern New South Wales, local insurers successfully arranged facultative reinsurance for commercial agricultural properties that no longer fit within treaty parameters due to updated flood maps and increased loss frequency.

What’s Next? Trends to Watch in 2025

Several trends are shaping facultative reinsurance in the Australian market this year:

• Digitalisation: Placement platforms are making it easier for insurers to access facultative capacity, with some deals now completed in hours rather than days.

• Data-driven underwriting: Advanced analytics are helping reinsurers price unique risks more accurately, encouraging broader use of facultative arrangements.

• Capacity crunch: As treaty reinsurance becomes more expensive globally, facultative reinsurance is filling the gap—especially for climate-exposed and cyber risks.

Ultimately, facultative reinsurance is becoming a strategic lever for Australian insurers to navigate an increasingly uncertain landscape.