Facultative Re Sees Global Renaissance

That changed seven or eight years ago, with improvements in data collection, according to Mr. Richardson.

"The quality of the information the original underwriters had been requesting from the original clients, until seven or eight years ago, was patchy," he said, noting that detail was lacking, along with necessary information about natural catastrophe perils, "even down to inaccuracy of the ZIP code of the locations being insured."

A huge push to improve the quality of data meant the original underwriters had to make a big effort to bolster the information collected. The original retail brokers responded by gathering more accurate and detailed data from their clients.

"That really helped the facultative market," he said. "As soon as you were able to get the information electronically given to you, you could really start to home in on some of the areas of concern to clients on that account or group of accounts."

At the same time, he added, "something began to happen on the treaty market, which was that people started to buy global treaties, not local or regional treaties. Some very mega-sized treaties were purchased by the very big insurers."

What this did was leave gaps in coverage, "because when they were previously buying their own treaty cover, they would have something much more tailor-made to their own book of business," Mr. Richardson explained.

"The quality of information and the global treaty was the beginning of modern fac, which we call it now, where it's bought in a much more sophisticated way."

Facultative coverage can get very specific, down to an individual building, "or a location that correlates badly from a cat-modeling position," he said.

Another reason for the growth in the facultative market is that large insurers over the last few years have elected to retain more away from their treaty, he said.

"Instead of buying the treaty in excess of $25 million, they're buying it in excess of $50 million," Mr. Richardson said, leaving them with heavy exposure on certain accounts. "They buy first-loss facultative to protect them and protect their net retentions."

This strategy is popular, especially in the softening market, and for clients who write "very heavy, large industry," such as steel, mining, petrochemical or the power business, he said. What's more, due to the sheer exposure of these industries, "a small property loss can turn into a very large business interruption loss," he noted.

Already this year there have been more than $7 billion of large-risk losses, "and that's made a huge difference to people's position on the heavy industry. You've seen the price of oil, the price of steel, or anything that's got a commodity-based cover."

Many primary insurers now writing this business, he said, "are relying heavily on facultative to get them to the position–the net position–they would like to be on that account."

"It's so diverse, which makes it fascinating," Mr. Richardson said. "Facultative has never been a stronger market. It's vibrant, it's come through hard and soft cycles, large cat events and it continues to grow. It is increasingly a more popular product for certain clients."