September 13th, 2011

Facultative Insurance Update

Posted at 1:00 AM ET

reina_massimo_-gcciMassimo Reina, Head of GC Fac® - International

The factors that have impacted the broader market in 2011 have, for the most part, flowed through to the facultative insurance business to similar effect. The early-year catastrophes in Japan, Australia and New Zealand left participants questioning whether there would be adequate market capacity, but by midyear, we noted ample available cover. We expect facultative catastrophe prices, in aggregate, to be flat to moderately up for the remainder of the year. On the other hand, non-catastrophe prices remain under pressure, while non-property classes continue their downward trend in pricing.

For the most part, large individual claims from the disasters in the Asia-Pacific region have been in line with expectations. One large and potentially significant area where we do not yet have clarity, however, is contingent business interruption (CBI) claims. We do not expect to have full results until early 2012; in the meantime, some insurers and reinsurers are restricting coverage for such risks.

Guy Carpenter has been driving an emerging secular trend in the use of facultative insurance: a move away from opportunistic buying toward a more strategic approach to facultative as a thoughtful component in a carefully managed portfolio. The use of sophisticated tools and strategies allows for efficient blending of treaty and facultative insurance to improve the portfolio’s risk and return characteristics.

Unsurprisingly, this trend has proved challenging to smaller brokerage firms, which often do not have access to the analytical tools and resources required for this sort of work. As a result, we expect to see an acceleration of the consolidation that we have witnessed over the past several years.

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