A surge in large single risk losses during the first quarter of 2008 is focusing attention on the value of facultative reinsurance as a means of guarding against the negative impact on insurers’ results from a series of ‘shock’ losses.
Whilst fortuitous, rather than systemic in nature, the collective scale and frequency of the Q1 losses – which have been spread across a wide range of industries and geographical areas – are a cause of increasing concern in the insurance and reinsurance markets. As a result, there is growing speculation that the losses could start to stabilise primary rates, at least in specific occupancies or classes of business.
Although no overriding pattern has emerged, a significant proportion of the losses have come from the mining, energy and steel sectors where, in a number of cases, the size of loss has been boosted by heavy business interruption and contingent business interruption claims fuelled by commodity prices. Largely driven by the huge appetite for primary resources, particularly from China, commodity prices are now also being pushed to new highs through the demand for ‘safe haven’ investments.
The potential threat, which a string of large single losses could pose to an insurer’s results, has been further exacerbated by the shift for underwriting operations to maintain higher treaty retentions.
In addition, as treaty programmes pricing is designed to align relatively closely with a cedant’s underwriting results, insurers that experience a series of such losses could see an individualised impact in terms of future treaty costs. This in turn could impact competitive positioning andmargins in an already tough market.
Accordingly, various insurers are now considering facultative reinsurance both as a method of boosting sideways protection while avoiding the costly process of buying down retentions and of swiftly tailoring treaty programmes to reflect rapidly changing market dynamics. Perceived advantages of such a route also include the ability to maintain, or even grow, business levels in the affected classes if pricing, terms and conditions stabilise.
In this context, facultative reinsurance also has applications for the captive sector where it offers a means of rebuilding attachment points at mid-term if a series of large single risk losses has exhausted captive or self insured retentions, so lowering insurers’ attachment points for the remainder of the policy term.

erik.nikodem@benfieldgroup.com