US insurers turn to facultative reinsurance as strategic growth tool

US insurers are increasing their use of facultative reinsurance to pursue growth while managing capital and volatility.

Key points:
US insurers’ showing greater fac utilization
Strategic fac placements becoming more commonplace in programmes
Fac appetite varies by line of business 

“Fac gives insurers the flexibility to pursue opportunities on the front line, while managing their aggregation, volatility and capital consumption.”

US insurers are increasing their use of facultative reinsurance, but a more fundamental shift is also underway as cedants move from purely transactional placements towards strategic solutions designed to support growth, manage capital and control volatility.

That is the assessment of Laura Hunt, CEO, US Facultative at Aon’s Reinsurance Solutions, who believes insurers are increasingly considering facultative protection alongside their wider reinsurance arrangements rather than purchasing it on a risk-by-risk basis alone.

“US cedents are definitely increasing their use of facultative,” Hunt told APCIA Today. “Fac gives insurers the flexibility to pursue opportunities on the front line, while managing their aggregation, volatility and capital consumption.”

The shift is particularly evident in property, where some insurers are using facultative capacity to write larger lines and secure more prominent positions on major commercial placements. Without sufficient capacity, Hunt explained, insurers risk losing leading positions. 

But the availability of facultative capacity varies considerably between business lines. Property is experiencing the strongest competitive pressure, with common rate reductions and plentiful reinsurance capacity. Hunt also believes concerns over casualty profitability are encouraging some reinsurers to allocate more capital to property.

Casualty, however, presents a different picture. “The US casualty market is not soft the way it is in the rest of the world,” she said.

Capacity remains available in casualty, but reinsurers have become more selective, reducing limits and increasing attachment points, particularly for auto liability, construction and other severity-driven exposures.

Meanwhile, Hunt said, Specialty Lines are more dependent on individual risk characteristics, with reinsurers adjusting their deployment of capacity across financial lines, cyber, directors and officers liability and professional indemnity.

For Hunt, the central question is increasingly not whether capacity exists, but where reinsurers are prepared to deploy it and on what terms.

Facilities gain momentum

One of the most significant developments is growing demand for ceded facultative facilities, which can provide a more streamlined alternative to repeated individual placements. Hunt said Aon has a particularly substantial US facultative operation, including a dedicated team focused exclusively on facilities.

Rather than replacing treaty reinsurance, these arrangements can complement existing programmes by amalgamating similar exposures and reducing the administrative burden associated with individual placements.

“We can package risks together and give the client a much more streamlined approach,” she explained.

The approach is also gaining traction among managing general agents (MGAs), particularly where programmes are not yet sufficiently established or substantial to secure appropriate treaty arrangements.

Facilities can offer treaty-like support while retaining specific underwriting parameters, referrals and exclusions, Hunt explained. She added that the growing availability of detailed exposure data is making these arrangements more effective, allowing brokers to assess accumulation and match capital more precisely to individual portfolios.

Aon's analytical capabilities are particularly strong in property, and the business is developing its casualty data capabilities. Better data is helping transform the relationship between facultative and treaty reinsurance.

“Fac is no longer transactional,” Hunt said, although she stressed that individual risk placements will remain important. “Bridging the gaps between treaty, facility and then the individual risk is the way to go.”

Inflation and emerging risks

Looking ahead, Hunt believes inflation could prove particularly influential in shaping the US facultative market. Higher repair costs, medical expenses and wages are increasing claims severity and potentially eroding insurance limits more quickly.

She expects this to reinforce existing pressures on casualty reinsurance, particularly in auto liability, trucking and construction. Property should remain competitive, although rising replacement costs and increasing TIV’s could eventually moderate rate reductions.

Emerging exposures, including PFAS (Per- and polyfluoroalkyl substances) and artificial intelligence, present additional uncertainty, Hunt noted.

Hunt questioned whether AI-related liabilities would ultimately generate standalone insurance products or be incorporated into existing coverages as a peril..

Nevertheless, her broader outlook remains focused on how reinsurers choose to allocate capacity. “I really think the next phase of the US facultative market will be defined less by whether capacity is available, but increasingly by where reinsurers choose to deploy it and how they choose to deploy it.”

Laura Hunt is the CEO,US Facultative at Aon’s Reinsurance Solutions. 

For more news from the American Property Casualty Insurance Association (APCIA) click here.

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.