Facultative reinsurance

What is facultative reinsurance?

Facultative reinsurance is reinsurance negotiated individually for a single risk, or a defined package of risks, rather than for a whole portfolio. "Facultative" means optional: the insurer decides whether to offer the risk, and each reinsurer decides whether to accept it, at what share and price. IRDAI's reinsurance regulations define it as reinsurance where "neither the cedant is obliged to submit these risks to the reinsurer nor the reinsurer is obliged to provide reinsurance protection".

Insurers use facultative reinsurance when a risk does not fit their treaty reinsurance, either because it is too large, because it falls under a treaty exclusion, or because it is unusual enough that the insurer wants a specialist's view on price.

When facultative reinsurance is used

How facultative reinsurance works in India

• Large risks need approval. The IRDAI (Insurance Products) Regulations, 2024 define a large risk as a single exposure above the insurer's underwriting capacity, which is the largest risk it can carry with treaty support. A large risk can be underwritten only with the prior approval of the insurer's Risk Management Committee, and the balance above capacity is normally placed facultatively.
• Order of preference applies. Under the IRDAI (Re-insurance) Regulations, 2018 (amended 2023), cedants must seek lead terms from Indian reinsurers first, then offer participation in order to foreign reinsurance branches and qualifying IFSC insurance offices, other IIOs, and finally cross-border reinsurers. Other Indian direct insurers may take part only through per-risk facultative placements in classes they are registered for.
• Limits on going direct to parents. A cedant may offer participation directly to the overseas parent of a foreign reinsurance branch only in defined cases, such as property risks with a total sum insured of ₹2,500 crore or more at one location, liability of ₹100 crore or more per event, aviation, oil and upstream energy, and marine hull, or with IRDAI's prior approval.
• Documents. Terms are recorded in a reinsurance slip and confirmed by a cover note issued by the reinsurer or an authorised reinsurance broker. Insurers file new reinsurance arrangements made during the year with IRDAI.

Typical steps in a facultative placement

1. The direct insurer underwrites the risk and fixes its retention and any treaty share.
2. It prepares a slip with the risk details, survey report, values, loss history and proposed terms.
3. Lead terms are sought from reinsurers, directly or through a reinsurance broker.
4. Shares are placed in the order of preference until the risk is fully covered.
5. Cover notes are issued and the direct policy is issued or confirmed.

Facultative vs treaty reinsurance

What facultative reinsurance means for distribution

• Build in time. A large commercial account that needs facultative support can take days or weeks to place, especially around the 1 April renewal season. Brokers and corporate agents should collect risk surveys, valuations and claim history early.
• Quality of the submission drives price. Reinsurers price facultative risks on the information they see. A clear risk report with fire protection details, maintenance records and a clean loss history often earns better terms.
• Lead terms set the deal. The reinsurer that quotes lead terms effectively sets the price and conditions for the placement. Indian reinsurers must be approached first, so their appetite matters a great deal for large Indian risks.
• Life cases above limits. For very large term or key person covers, the life insurer may seek facultative support. Advisers should warn customers that extra medical and financial evidence will be required and decisions may take longer.
• Customer explanation. If a quote changes after facultative feedback, the adviser should explain that the direct insurer depends on reinsurers for that size of risk, and that the revised terms reflect what the market will accept.