NEWS
Buyers are turning to facultative business to plug holes
Turmoil in the market has left cedants seeking solutions from facultative reinsurance: McGill.
The 2023 reinsurance reset in property cat business which largely shifted volatility from reinsurers to cedants, acted as a catalyst for the facultative market. Brokers were suddenly dealing with a lot more demand for ultra-bespoke solutions, facultative leaders at broker McGill & Partners have claimed.
“McGill has definitely seen a resurgence in buying facultative business,” Kian McCarthy, partner, told Baden-Baden Today, commenting on what he observed in the aftermath of the fallout from the property-cat reset.
“That boom coincided very nicely with our building out and growing,” McCarthy said. The four-year-old brokerage launched offices in Germany and Switzerland in September, both of which are focused on facultative business. The broker launched in London in 2019.
Cedants have had to take a hard look at their programmes since the 1/1 2023 renewals, ultimately losing lower layers. Rates for aggregate programmes and frequency layers increased dramatically. On the back of this, McGill was not the only player to expect more business for facultative lines, which are often called on to plug gaps.
But many buyers are now looking to do more than just plug gaps, as a hard market made their facultative needs both broader and more sophisticated. McGill partner Antonio Simone believes many buyers are attempting to use facultative solutions to round out their own buying strategies as well comply with any regulatory and capital demands.
“We have to understand how the treaties function.”
Arjan Tichelaar, McGill & Partners
“The overall demand in terms of volume was up,” McCarthy said. He said it was not exclusively focused on lower layers and aggregates whose disappearance characterised the 2023 reset. Partner Arjan Tichelaar added that he saw plenty of work on upper layers as well as the buffer layers.
“It’s client-specific and each will have their own view of risk,” said McCarthy. “They may be looking to cover an individual risk, part of a portfolio, a particular segment or risk exposure, or a particular class.
“Clients are now strategically focused on their portfolio and growth and capital models,” he added. The upshot is that McGill likes its positioning as a broker with a finely detailed client focus—and it seems it was a good time to launch facultative-focused offices in continental Europe.
A laser tool
“In the old days, you just patched a hole,” Tichelaar said on how the business has evolved. “Now, we have to understand how the treaties function, and might have to challenge it.” He said the aim is to “craft a laser tool rather than a blunt instrument”.
One other consequence of the fallout from the property-cat reset is a renewed interest in parametric solutions even if they require more client sophistication. Cedants arriving with holes in their treaty programmes are also looking at “cat-in-a-box” parametric solutions. “We’ve done that on a number of occasions,” Simone said.
“Large corporate is where the capacity need is.”
Kian McCarthy, McGill & Partners
They expect demand to remain high, although the scope of lines of business is changing. “Large corporate is where the capacity need is,” McCarthy said when asked about demand directions. In addition, he said, heavy industry, distressed business risks and bundled cessions are coming into focus.
Basic catastrophe risk is no longer the likely focal point. Treaty deals are “getting done” with capacity in the market proving more solid than the hard market rhetoric would have it.
But secondary perils may represent an opportunity in Europe. German flooding several years back could be a case in point.
“We would have expected the reinsurance market to respond with larger limits; it was a surprise that it didn’t seem to happen,” McCarthy said.
Addressing accumulation risks in ever more business lines might also be a possible field for facultative reinsurance.
Main image: Shutterstock / Anna81