F


acultative reinsurance has rarely enjoyed as much attention as it has received of late, the growth in interest in this otherwise sleepy field of reinsurance triggered by the unusually high levels of


catastrophe losses in the first half of 2011. The tragic earthquake and tsunami in Japan and the disastrous


earthquake in New Zealand were just two of the major catastrophic events which raised risk awareness among organisations managing large risks. Now, such organisations in those countries and all around the world are looking again at their policy wordings, coverage and limits to ensure they are fully insured if catastrophes strike.


Large, specialist insurance coverage—the type required for large


factories, oil and gas installations or large ships—is often available only in the facultative reinsurance market. But while the level of activity in facultative reinsurance has risen of late, the actual premium volume is this sector has remained roughly the same.


This is because the trend in major facultative markets, particularly in


the developing world, has been for insurers to retain more of their risk locally. This is partly as a consequence of an increasing maturity in terms of local markets and partly as a result of economic constraints dictating risk appetites.


In non-catastrophe-related facultative business, however, the price trend


has remained downwards. At the end of 2011, global facultative prices in property range from stagnant to minus 5 percent compared with the same time last year. A similar story has been seen in some non-cat-exposed energy risks.


Facultative reinsurance is generally more expensive because as a non-


standard risk it requires separate underwriting. But pricing movements will mirror treaty reinsurance movements and in areas where treaty protections are costing more money—such as catastrophe-affected property, energy and construction—prices can be expected to rise.


An interesting trend in the facultative market is the way independent facultative brokers have been able to compete very effectively on a global basis with much bigger rivals. Independent yet well established brokers have been able to offer speed of delivery, agility and regional expertise, which are all key attributes in the facultative market, particularly at times when customers are expecting more for less.


However, the most striking observation about the facultative reinsurance landscape has to be the emergence of two new hubs: Singapore and Dubai through the Dubai International Financial Centre (DIFC).


These two markets, which have focused initially on capturing business


from their own regions, have begun to compete with the London market in the facultative arena.


Most agree that London can still offer a better all-round service and


expertise especially on wordings and claims issues. But Dubai has attracted some major players, which also have a presence in the Lloyd’s and the London markets.


“ An interesting trend is the way independent facultative brokers have been able to compete very effectively on a global basis with much bigger rivals.”


When London is regarded as expensive, clients will sometimes go to


the Dubai-based branches of the same companies and receive a better deal. London brokers are also sometimes re-directed by a London-based reinsurer to use a regional office because of territorial splits dictated by head office guidelines.


This trend towards the globalisation of facultative risk placement would


appear to be increasing gradually, driven by tax considerations and operating costs. In addition, regulations at the DIFC are straightforward, understandable and possibly not subject to as much regular development as those in Europe.


As Dubai becomes a hub for MENA risks, some underwriters are


gaining expertise rapidly and will also consider risks from Turkey, as well as Central Asian countries such as Kazakhstan and its neighbours.


The Arabian Gulf construction market, which has traditionally been an


active source of facultative reinsurance business, has waned since 2007 and project finance has stalled in many cases. However, there remains a steady stream of government-backed infrastructure projects worth hundreds of billions of dollars, particularly in Saudi Arabia, the UAE and Qatar, which has produced a stable level of facultative business for the London market and others.


In the Arabian Gulf in general, the amount of government money going


into development means that facultative reinsurance accounts for about a third of regional premium. Another Middle East territory, Iraq, has been mooted as a source of further optimism in construction-related facultative business. While there are indeed some risks appearing on the market, they are still few and far between.


Latin American facultative, another major focus for United Insurance


Brokers, is also interesting because it keeps insurers and brokers on their toes. Mexico remains a healthy source of facultative business while Brazil, the region’s biggest facultative market, has been subject to regulatory changes that have created a new dynamic. Since early 2011, reinsurance clients in Brazil have been forced to place 40 percent of any facultative risk with domestic reinsurers if the required capacity is available.


Similar or more extreme complications exist in other parts of the world.


For example, in Nigeria and Morocco organisations seeking to insure large risks on a facultative reinsurance basis must place a significant amount with the local insurance market—70 percent in Nigeria’s case. Multinational corporations in those countries, such as those involved in the oil business, have argued that they would rather seek rated international capacity.


November 2011 | INTELLIGENT INSURER | 51


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