Insurers Scale Facultative Cover as Cyber/Climate Risks Grow
Global insurers are increasingly turning to facultative reinsurance – insurance purchased for individual risks rather than entire portfolios – as they navigate emerging threats from cyber attacks, climate change, and volatile financial markets.
A survey of 300 senior insurance executives by WTW, the global insurance broker and risk management firm, found that 68% plan to increase their facultative reinsurance purchases over the next two years.
The shift comes as insurers seek more flexibility in managing specific risks rather than relying solely on treaty reinsurance, which covers entire portfolios but often lacks the granularity needed for complex modern risks.
“The rapid development of AI carries unknown risks within it. As the technology evolves, we may see more carriers trying to develop solutions that protect their clients"
Cyber Risk Drives Strategic Shift
The research reveals cyber insurance ranks as both a top business opportunity and a key concern for 58% of respondents.
This dual perception is driving demand for facultative solutions that allow insurers to participate in cyber coverage while managing their exposure through risk transfer mechanisms.
“The rapid development of AI carries unknown risks within it. As the technology evolves, we may see more carriers trying to develop solutions that protect their clients as well as cedents looking for facultative cover to protect themselves from these emerging risks,” says Armando Montenegro, Head of Facultative for Latin America at WTW.
Regional Market Evolution
In North America, the market has shifted from hard to soft conditions over the past year, leading insurers to seek increased capacity.
Ivan Breen, WTW's Head of North American Facultative, says: “There's uncertainty and no one is quite sure about the scale of potential losses on their books in areas such as cyber and the energy sector, which has suffered large losses in recent years.”
The European market has maintained equilibrium between demand and capacity, supported by advances in data modeling. However, certain risks remain challenging to cover, including natural catastrophes in loss-affected countries and industries like waste processing.
In Asia-Pacific, local insurers face capacity constraints that differ from other regions. Matt Nash, WTW Head of Facultative Pacific, notes: “Many rely on treaty reinsurance to provide additional capacity, with some retaining little of the risk themselves.
“But those treaties have become more restrictive over the last few years, so carriers are increasingly looking to facultative to fill the gaps.”
“There's uncertainty and no one is quite sure about the scale of potential losses on their books in areas such as cyber and the energy sector"
Market Constraints and Evolution
Despite growing demand, 56% of respondents cite limited capacity as a barrier to purchasing sufficient facultative coverage.
The same proportion point to high premiums as an obstacle. The survey indicates that 81% of insurers select reinsurance providers based on available capacity.
Claims payment capability ranks as a critical factor, with 80% of respondents highlighting its importance.
This has become particularly relevant as some US cedents – insurance companies that transfer risk to reinsurers – report difficulties securing claim payments from newer, overseas reinsurance providers.
Traditional lines remain significant, with property and casualty risks continuing as the most frequently reinsured categories.
However, newer risk types are gaining prominence. Environmental impairment liability accounts for 47% of facultative purchases, while professional indemnity represents 42% and cyber coverage 34%.
“As demand for facultative cover increases, supply is likely to be limited. Cedents should focus on presenting themselves favorably to reinsurance markets"
Financial ratings also drive demand, with 55% of respondents citing rating improvement as a key motivation for facultative purchases. This reflects increased regulatory scrutiny and financial market requirements across the insurance sector.
The complexity of facultative arrangements presents additional challenges. The survey reveals that 59% of insurers cite complex negotiations and administration as barriers to securing coverage, with this figure rising to 64% in EMEA markets.
Furthermore, 56% of respondents highlight reinsurers' information requirements as an obstacle, as these often exceed the data collected when initially writing the risk.
In Latin America, where natural catastrophe exposure is increasing with climate change, insurers are particularly focused on using facultative coverage to fill gaps in treaty programmes.
Technological transformation is also shaping market sentiment in the region, with 70% of Latin American respondents ranking artificial intelligence and automation among their top strategic objectives.
“As demand for facultative cover increases, supply is likely to be limited. Cedents should focus on presenting themselves favorably to reinsurance markets, using the data they collect from clients to create more detailed and accurate submissions,” says Matt Nash, WTW Head of Facultative, Pacific.
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