PartnerRe’s head of facultative talks about the pressures, trends and evolving priorities of the market

Q: What is happening with rates and terms and conditions in the facultative reinsurance market?

A: Worldwide markets are clearly softening, but at a modest pace compared to previous soft cycles. Having learned important lessons from the late 1990s, there is more discipline in the market and greater attention to risk management. There has also been a general upgrade in the quantitative skills and modelling technology in the industry, so naïve capacity is much harder to find.

In simple terms, demand is down while supply is up. Overall demand is down owing to a variety of reasons starting with the economic recession reducing values, projects and putting pressure on insurers’ top line. This pressure on demand is compounded as cedants try to retain more premium – and risk – to offset the pressure on their top line.

Supply is up for a variety of reasons.There are several smaller new entrants into the facultative market and several players that have increased capacity in recent years. Part of the excess capacity comes from the fact that in some markets – the UK, in particular – the large direct insurers are taking facultative shares when they are unable to get the business on a coinsurance basis. In contrast to these new entrants and capacity increases, there have been no meaningful exits from the markets.

Insurance buyers now seem to expect reductions almost automatically, and the direct market tries to pass on these reductions to reinsurers. However, as I said, the market today is much more disciplined than in previous years.

Q: Tell us about loss experience in 2010 – in particular Chile and Deepwater. How are they likely to affect the market?

A: There are two exceptions to the softening trend: Chile and offshore energy, where the earthquake and the Deepwater Horizon disaster respectively have led to modified pricing assumptions. Offshore energy is experiencing rate increases averaging 20%-30% and considerably more for deepwater drilling.

For the time being, these two significant losses seem to have had local impact only. In Latin America, the Chile quake has really only affected Chile prices. In offshore, there has been some improvement in pricing, but without any global knock-on effect. Nevertheless, 2010 has been a heavy year in terms of cat losses, with most activity focused in the first half-year.

Q: What types of risk does direct and facultative (D&F), including regional markets, generally encompass?

A: The D&F markets typically cover the largest and most complex property placements – risks that are excluded or only partially covered by reinsurance treaties because of their capacity needs or complexity. This typically includes large industrial and commercial placements, which are coinsured among many global (re)insurers and critical cat-exposed business. Risks typically include large complex properties and construction properties such as offshore oil rigs, steel companies, mining and power generation companies, and so on.

Q: What are the most important markets for D&F worldwide, and how is that evolving?

A: The US market is still the most important market, plus all US market business placed through the London wholesale market. Emerging markets tend to be more ‘traditional fac’ driven, at least for the time being. A gradual, long-term trend is that an increasing proportion of facultative business is staying in regional markets rather than being placed in London and the international markets. This is because domestic companies are increasingly capable of handling larger, more complex risks and several large multinationals have been writing risks through recently established local subsidiaries.

Q: Tell me about the distribution channels in D&F and the role of the broker.

A: D&F placements tend to be a patchwork construction that encompasses all elements of the risk-bearing market – direct and reinsurance alike. Brokers tend to have a clear understanding of how to build up capacity by targeting players interested in primary, mid-layer and high-excess layers, without looking for a traditional quota share approach.

Q: What are the key trends affecting the fac (re)insurance market?

A: The facultative markets experience both cyclical pressures and long-term trends. The current softening conditions are all cyclical in nature. The two most notable long-term trends are the aforementioned shift to regional markets and a long-term bright outlook for facultative demand. As world economies recover and develop over the long-term, and as enormous economic power emerges from the developing world, large complex properties and individual risk accumulations should develop faster than average, fueling a healthy demand in facultative markets. GR