Facultative reinsurance is gaining prominence as a strategic risk management tool, but insurers face challenges accessing sufficient capacity amid market volatility, according to the “Facultative Reinsurance Report 2024” published by WTW.
The report, based on a survey conducted by Coleman Parkes Research, highlights the evolving role of facultative reinsurance in the insurance market.
The survey gathered responses from 300 senior decision-makers at property and casualty (P&C) insurers across Europe, North America, Asia Pacific, and Latin America.
WTW said that the findings reflect a shift in the perception of facultative reinsurance, from a transactional solution to a strategic instrument for addressing gaps in treaty coverage and managing risk in an increasingly complex environment.
The report revealed that 86% of respondents agreed or strongly agreed that facultative reinsurance plays a key role in their strategies for managing risk, capacity, capital, and appetite.
Additionally, 68% indicated plans to increase their use of facultative reinsurance over the next two years. However, 56% cited limited capacity as a significant barrier, underscoring concerns about the reinsurance market's ability to meet growing demand.
The survey also shed light on the types of risks insurers address through facultative reinsurance. Environmental impairment liability accounted for 47% of placements, professional indemnity for 42%, and cyber insurance for 34%.
Cyber insurance emerged as a top priority, with 58% of respondents identifying it as both a business opportunity and a key risk.
Market conditions vary across regions, influencing how insurers leverage facultative reinsurance. In North America, insurers are expanding into new product areas, including cyber and energy, amid softer market conditions.
These efforts aim to manage risk while pursuing growth opportunities. The focus on maintaining strong financial ratings drives many insurers to seek coverage from highly rated reinsurers.
In Asia Pacific, capacity constraints are prompting greater reliance on facultative solutions. Meanwhile, European and Latin American insurers are contending with regulatory pressures and increasing natural catastrophe risks, driving demand for facultative coverage to manage complex placements and emerging threats such as climate change and cyber security.
Garret Gaughan (pictured above), head of direct and facultative at WTW, noted that economic volatility is reshaping the insurance landscape, influencing insurers' risk appetites, capital strategies, and growth plans.
“The results of our survey indicate that insurers are increasingly leveraging facultative reinsurance as a tool to manage these challenges. We are seeing facultative reinsurance increasingly used by carriers to enable expansion into new riskier product areas, for example,” Gaughan said.
Gaughan highlighted a growing connection between strategic objectives and new use cases for facultative reinsurance to enable business growth.
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