Fac market compelled to follow declining energy rates: Acrisure Re’s Cooper

The power and energy market is currently characterised by an abundance of available capacity, as many reinsurers seek to maintain or grow their presence in the sector, says Acrisure Re’s head of power international facultative, Ed Cooper.

This is occurring within a softening rate environment, leading to increased competition and downward pressure on pricing. Pricing sentiment has shifted accordingly, he adds. 

“The facultative market is largely compelled to follow the broader trend of declining rates, with double-digit rate reductions becoming normal,” Cooper says in an interview with Insurance Day. “These reductions vary depending on specific risk exposure,” he adds, “but the overall trend has prompted clients to reassess their spending. Reinsurers now face the challenge of offering more competitive terms than those previously accepted.”

As pricing targets continue to decrease for cedants, greater scrutiny is being placed on facultative reinsurance purchases.

“Decisions are now driven not only by price effectiveness relative to the prior year, but also by whether the same level of protection is still required,” Cooper says. “Given the ample capacity available, cedants are often seeing reduced orders even when meeting the pricing targets requested,” he adds.

Consequently, the need for facultative reinsurance diminishes or disappears altogether, he continues, especially when larger lines are no longer used. This highlights a "shifting landscape”, Cooper says, where the traditional value proposition of facultative reinsurance must evolve to stay relevant.

Vertical or quota share

The move towards vertical or quota share placements can be attributed to the market dynamics.

Cooper explains that, in a hard market, completing a placement typically requires a broader mix of capacity and pricing variability. Conversely, in a soft market, increased competition and reduced pricing variance allow for more straightforward placements, which Cooper says naturally leads to quota share structures where markets can participate uniformly.

“While the softening market cycle places downward pressure on profitability, it also creates new opportunities. Some markets, especially those facing reduced or lost shares on traditional placements, are seeking to supplement their participation through facultative reinsurance. Others, unable to secure positions on a non-proportional – layered – basis, are now compelled to consider vertical – quota share – arrangements,” Cooper says.

Not all reinsurers are able or willing to engage on a vertical (quota share) basis. To maintain income or preserve a position on an account, Cooper says they may instead offer facultative support on a non-proportional basis. At the same time, while many cedants are under pressure to grow their books – often reducing facultative spending – some are relying on facultative reinsurance, Cooper adds, to enable them to offer competitive vertical or quota share solutions to their own clients.

Facultative advantages

The primary advantage of facultative reinsurance over treaty reinsurance is its flexibility to be arranged on an individual account basis. While treaty reinsurance provides protection for an entire portfolio of business, facultative reinsurance allows insurers to secure coverage tailored to specific risks. This enables insurers to selectively cover exposures that fall outside their treaty programme or require bespoke solutions.

An example Cooper gives is that an insurer might use facultative reinsurance to purchase single-peril coverage – such as protection against earthquake or flood – if that is more relevant to the risk in question than a broader all-risk policy.

“Decisions are now driven not only by price effectiveness relative to the prior year, but also by whether the same level of protection is still required. Given the ample capacity available, cedants are often seeing reduced orders even when meeting the pricing targets requested"

^{Ed Cooper
Acrisure Re}

Facultative placements also offer greater control over attachment points, he adds, allowing insurers to determine precisely where coverage begins for a given risk. In contrast, treaty structures tend to be more rigid, he continues, with attachment points standardised across a line of business.

However, the key limitation of facultative reinsurance lies in the lack of economies of scale.

Cooper explains: “Unlike treaty reinsurance, which spreads cost across a portfolio and benefits from aggregation, facultative placements are negotiated individually. This can make them less cost-effective when considered on a per-risk basis, particularly for smaller or lower-margin exposures.”

Top three risks

The top three risks facing the power and energy market at present are geopolitical, regulatory and technological.

Cooper notes how geopolitical risk creates challenges around fuel supply. “One of the largest challenges over the previous years has been the Russia and Ukraine conflict which has subsequently affected gas supplies,” he says.

“This as an example has been further compounded by sanctions applied. Overall, the reliability on specific countries for critical fuels both in conventional and renewable energy continues. For example, the extraction and processing of rare earths for renewables,” he adds.

On regulatory and energy transition risks, Cooper highlights that challenges related to decarbonisation and renewable energy targets continue to offer market uncertainties. This is compounded, he adds, by the timeframes in place to hit certain regulatory metrics, such as carbon pricing and/or emission standards.

Technology risk is twofold, Cooper says. One is the cyber risk associated with increasingly digitalised grids and infrastructures. More granularly, the fast advancements in technology, both in size and in certain instances prototypical nature, leads to invariable challenges with reliability.

He explains: “Lead times for critical parts for both proven and prototypical technologies is a hugely prevalent aspect for insurers evaluating risks and, linked in with supply chain, can make the most mundane of losses transpire into a significant event.”

Message to clients

Acrisure Re’s core message to clients in both the power and energy sectors is the importance of maintaining underwriting discipline in the current market environment, Cooper stresses.

“While the pressure to secure full order placements and preserve associated premium income is understandable, this must not come at the expense of the robust coverage required for these complex and high-risk classes,” he says.

When it comes to facultative reinsurance, he continues, clients should approach purchasing decisions as part of a long-term strategic plan, not just a short-term reaction at renewal.

“While opting out of facultative protection may yield immediate savings, it comes with significant trade-offs,” he says. “Not only is protection forfeited, but reinsurers removed from a placement may be unwilling or unable to re-engage later, potentially at higher cost or reduced capacity.”

Although clients are facing growing pressure to maintain placement orders and related premiums, it is critical to implement a long-term reinsurance strategy that can withstand market cycles in any direction. Facultative reinsurance plays a key role in that strategy.

Cooper concludes: “Given the exposure to both attritional and large-loss events in these sectors, volatility cannot be managed by pricing alone and comprehensive protection remains essential.”