Demand for facultative reinsurance is growing, however, supply remains static, and market dynamics differ greatly between accounts, lines of business and markets, according to Aon’s mid-year Reinsurance Market Dynamics report.
With the resetting of the property catastrophe market at January 1, insurers are turning to facultative reinsurance to build additional catastrophe capacity, reduce net exposures, and fill gaps in programs, as well as build non-catastrophe limits.
While demand for facultative reinsurance is increasing, capacity, although stable, is historically more limited than the larger treaty market, analysts explain.
“Facultative pricing is re-aligning with insurance market pricing, and as reinsurers seek to deploy catastrophe capacity where they see the most attractive returns. However, facultative markets vary by region, with the US more challenged than some other markets,” the report stated.
With higher net retentions and more limited catastrophe aggregate covers, insurers in the US are looking to use facultative cover to build catastrophe capacity on individual risk accounts,
However, US named windstorm is at a premium, requiring rate or structural changes to complete program towers. Demand for California facultative earthquake capacity is also in high demand following constraints in the wholesale markets.
Additionally, interest in facultative solutions to cover wildfire, US convective storms and tornado have also increased as treaty cover has retrenched, but capacity is limited, according to the report.
In the US casualty space, demand continues to be robust for facultative placements. Analysts added: “For auto liability, capacity was available at mid-year renewal but markets had greater scrutiny on deployment of limits in difficult venues and tougher risks.
“Capacity was more limited for general liability business and workers’ compensation due to limited markets willing to entertain the exposure. Overall, the expectations on reinsurance pricing were not always in line with what markets were willing to offer.”
Finally, the report found that facultative supply in Australia and New Zealand is meeting market demand on most accounts, although natural catastrophe covers for catastrophe-exposed large programs were more problematic.
Additionally, although demand for facultative reinsurance in the region is increasing, secondary high-rated accounts are receiving flat or reduced pricing, depending on loss history. Secondary perils are coming under increased scrutiny, the report also noted.
