Facultative reinsurers looking to capital markets

Facultative reinsurers are exploring capital markets techniques that could boost their competitive position in hard markets, while at the same time allowing underwriters to reduce excess capital in soft markets, Benfield has written in the 08 edition of The Fac Report.
“Structured as financial options, such market-based products in effect enable reinsurers to put down an early deposit on additional capacity, enabling them to establish facilities immediately when the cycle turns,” Benfield notes.
“During soft markets, these options are intended to enable reinsurers to shed excess capacity that might otherwise have been retained to respond quickly to market developments.”
From the point of view of the capital markets, one attraction is that by reducing the lead-time involved in establishing additional capacity when rates are rising, investors are also better positioning themselves to maximize profits during hard-market windows.
“The move comes as capital markets’ interest in non-life insurance and reinsurance related products is being further stimulated by the U.S. subprime mortgage crisis, which has again highlighted the attractions of insurance and reinsurance as a sector whose performance is largely uncorrelated with that of other financial markets,” Benfield observes.
The focus on products for facultative reinsurers which purchase risks from cedants on a per-policy basis (as opposed to a treaty basis) “is another sign that a reliance on capital markets for capital, previously more of the preserve of the reinsurance treaty sector due both to the scale and volume of business involved, is becoming increasingly applicable to all areas of the insurance market.”