As the annual mayhem of the Monte Carlo Rendez-Vous swung around this year, a selection of leaders in the facultative reinsurance market took time out of their no-doubt packed schedules to discuss how fac can survive in this rapidly softening and hugely competitive market.
It was a rather cosy affair with eight of you gathered for the Inside FAC Monte Carlo Roundtable at the Fairmont Hotel, which I think encouraged a lot of candid debate and good insight into the real issues facing the space.
The major theme was the change in buying patterns as big cedants have centralised purchasing and increased net retentions. While some believe this shift to be a consequence of the cyclical soft market, buyers are of the mind that it is a structural change.
The roundtable attendees heard from one such buyer, who argued that technology and enhanced analytics have revealed the inefficiency of facultative on a portfolio-wide basis.
In true Monte Carlo form, a decentralised approach to buying facultative cover was compared to playing roulette and hoping volatility would hit where you placed a chip.
The facultative market seems to be dogged by a perception of being expensive and inefficient compared to treaty, which is seen as a necessary buy. And brokers and reinsurers around the table were quick to point out how difficult it is to prove the value of a low frequency, high severity product such as fac based purely on short-term recoveries versus spend.
Despite perhaps five years of seeing little recovery from facultative protection, over a longer horizon of, say, 10 years, it has indeed proved its worth.
It was argued that the fac space should leverage these same improvements in analytics to find potential carve-outs, which could help prevent fac from being seen as merely a roulette-type gamble.
The fate of the facultative market is not helped by the fact that the ILS sector continues to make inroads into the traditional reinsurance space, surging into US property cat and forcing capital out into other lines.
But it is not all doom and gloom, as many of you saw the positive side to the budding alternative reinsurance sector - including the potential for deploying capacity on massive single risks or using it to back a pool of facultative risks.
The rise of fac facilities was indeed another point of discussion as a few of you remarked on increased activity in this space. However it still seems unclear whether the growing appetite for these kinds of structures is again merely a low rate environment offshoot or a permanent feature. What was clear from the talk was that the fac market needs to rise to the challenge of a changed buying landscape and make sure it can respond to the large buyers' new approach to purchasing fac.
If that nut can be cracked facultative will be in a much better position than its treaty counterpart to take on the new market dynamics. I hope the read will leave you feeling rather bullish on the fac market's outlook.
Enjoy the read. To view the supplement please click here.
Karina Whalley
Editor
Inside FAC