Monte Carlo Roundtable 2018

It seems like every year we predict that fac is on the up, after languishing in the doldrums for years on end. But the reality is, of course, a little more nuanced.

Carriers purchase fac for a variety of reasons. As one of the brokers at this year’s Inside FAC Monte Carlo roundtable summarised it: “The three key drivers for people buying fac are: taking away some of their aggregate cat accumulations; protecting their net retentions; or using fac as a tool for leading or getting bigger shares of programmes.”

Spot fac still has its place. As another participant noted, cat events in 2017 and beyond have landed cedants with an increasing amount of per-risk losses, and fac has always been an effective, albeit short-term, solution for volatility protection.

And let’s face it, while arbitrage is something of a dirty word, that brokers use in private but harrumph about when it’s mentioned in public, fac is a useful lever for carriers who are looking to lead a slip or hoping to get a bigger chunk of a programme.

But it’s clear that glib references to the ‘strategic’ use of fac are more than just a buzzword. Fac has held its own as a part of the hybrid solutions that combine different forms of reinsurance capital.

Look no further than Lloyd’s for evidence of the increasing utility of fac, as syndicates engage in a significant amount of re-underwriting, looking to de-risk troubled portolios and shift capacity to more attractive risks.

Ironically, some of the de-risking has involved D&F itself, indicating the challenges still facing the sector.

But while our roundtable participants seem to agree that fac volumes are up, there’s no one single factor driving that. Yes, there’s a bit of rate. Yes, there are bigger limits being bought. But overall, submissions aren’t up in any meaningful way.

What is shifting, it seems, is the perception of fac. Rather than being viewed as treaty’s disreputable sibling – a rather shameful family secret that nobody likes to admit to – it seems that fac is increasingly being invited to family gatherings. We all know major cedants still use fac with impunity when it suits their need – they just don’t like to admit it.

Brokers may have increasingly moved away from spot fac transactions towards facilities and hybrid solutions, and carriers may have ramped up their programme business to reduce their reliance on large single-risk placements, but the growing perception is that fac is simply another tool in the general reinsurance kit.

Brokers facilities might not be to everyone’s taste, and in the view of some participants, they are very much a cyclical thing. But their utility as halfway house between treaty and fac is undeniable. What will be interesting to watch is if, in the current regulatory environment, they retain their appeal.

If I were to sum up the conclusions of this meeting – and the outlook for fac in the quarters ahead – it would again be in the words of one of the brokers present: “There is more positive noise around fac which is driving opportunity”.

Hallelujah to that!

To view the Monte Carlo Roundtable supplement, please click here.

Gavin Bradshaw, Editor, Inside FAC

Related articles