It was not so long ago that those condemned to a career in Facultative business, the reinsuring of large single policies, gazed with envy at the largesse of Treaty colleagues, laying-off complete books of business on behalf of their insurer clients. Whilst the Treaty teams jetted off to the boardrooms of Bermuda and lunched at the best restaurants in Monte Carlo, the most the Fac guys could look forward to was a risk inspection at a paper mill in the arse-end of Belgium.
All that changed in the aftermath of 9/11. As treaty capacity dried up, in desperation insurers turned to facultative markets for their capacity and to their surprise they discovered that nibbling around portfolios by slicing away clusters of peak risk exposure they could be almost as effective at managing their capital requirements. Moreover, on the back of soaring prices, insurers became dependent on inventive placements to win and retain corporate business encouraging a new generation of movers and shakers to spot-trade risk. In a blink of an eye Fac became cool.
Whether the reinvention of Fac was a short-term fad or represents a more enduring shift in our market architecture is a question unanswered. Since those heydays, capital has flooded back into the market and prices have retreated from their historic highs. Insurers like FM Global can now put down lines of up to $ 1 billion without recourse to reinsurers and stalwarts of the facultative market like RSA and AIG are reportedly reducing spend by amounts of 20-50%. Even in the emerging economies like Brazil, egged-on by regulators, primary carriers have become pretty adept at co-insuring (sharing) risk, starving facultative markets of traditional sources of income and profit.
These are lean times for sure yet declining volumes will be of less concern to reinsurers whose focus is maintaining margin rather than growth in the current environment. For London brokers, however, the story could be quite different. Firms like THB and Cooper Gay have entered major corporate partnerships with big US wholesalers and others like RK Harrison and Miller have hired in high profile teams. The resiliency of the facultative business model over prolonged flat market conditions will be an important ingredient in the success of these producers; a factor that affects everyone in the market given the importance of the independent firms to Lloyd’s distribution platform.