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Zurich aims for new fac facility at 1.1

The trend for soft treaty capacity to absorb business previously ceded to the facultative market is set to continue with a new fac facility being planned by global insurer Zurich, sister title Inside FAC reported today (21 September).

The move continues the trend towards greater centralisation of reinsurance purchasing, which has been a predominant theme among major cedants in recent years, with Zurich understood to be eyeing a 1 January launch, assuming that it can get the appropriate back-end systems in place in time.

The new purchasing mechanism means that underwriters will still be able to purchase facultative reinsurance at the local level, with a 50 percent order in the open market and a 50 percent following line then going to a central vehicle. This central vehicle will then purchase an aggregate stop loss cover.

In its first year it is understood that Zurich intends the facility to be confined to its US and UK books, with an initial $30mn-$50mn of business subject to the new facility.

The move is noteworthy as Zurich has historically been a significant buyer of fac. However, the carrier has made substantive inroads into a spend that a few years ago was around the $500mn mark, with roughly $200mn in annual ceded premium entering 2015.

Since then, it is understood the carrier has reduced its fac spend further to around $175mn, and is now following the lead set by Travelers and Chubb in recent months with a new fac hybrid incorporating an aggregate stop loss cover mechanism.

Paul Horgan, Zurich's head of group reinsurance, has consistently made clear his view that the fac market needs to "rally around" and respond to the insurance giant's desire for a more centralised buying strategy, as well as hinting at the need for the market to engage more broadly with cedants' need for innovation.

Speaking recently to Inside FAC, he suggested that the fac market remains "in a defensive position, focused on a shrinking pie and engaging with its clients primarily at the transactional level". As such, "it is hard to be innovative on a broad basis one transaction at a time", he added.

Zurich's reshaping of its fac purchasing follows a recent pattern set by major cedants such as American International Group and Generali in 2012. Last year, Travelers, a major buyer of facultative reinsurance in the US, effectively pulled about $35mn in premium, equivalent to more than 70 percent of its fac spend.

FM Global, another significant US facultative buyer, has also pulled back substantially from the market in recent years by placing greater reliance on an aggregate stop loss.

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