Top of the agenda
The fac market is at ‘a great moment’, says Swiss Re’s Beat Strebel, and should take full advantage with greater innovation and proactivity
How would you describe current appetite and motivation for buying facultative reinsurance?
We have seen a clear increase in demand for facultative cover in 2018, with more submissions than a year ago. For the average request, capacity is higher than it used to be and, although not on every individual account or in every market, we have seen moderate to strong rate increases as well. Good examples are UK international business and also the German industrial risk segment.
One area where we see a continued decrease in demand is what I call the decentralised, traditional spot fac buying of the large global insurance companies. They are buying less facultative out of their local subsidiaries and these placements are increasingly ceded internally and placed centrally into more strategic, global vehicles – often facilities.
What we also see is an increase in demand due to poor treaty results. Some companies are trying to protect their treaties, by taking risks out as well as reducing volatility, and several clients have reduced their treaty capacity, with those risks coming back into the fac market.
Then there is also exposure increase. Partly it is model-driven, from underlying climate change and more extreme events. We are seeing more exposures in already very exposed risks – flood, wind and earthquake – and that is driving demand as well. So we see a lot of our clients buying a larger top layer, adding more capacity.
In addition, one segment where players like Swiss Re are specifically benefiting is the large number of Lloyd’s syndicates either reducing their capacity or even pulling out of certain direct and facultative lines, so there are a lot of portfolios coming to the market which are now offered to the Continental European players.
At the same time, Lloyd’s syndicates are also buying more facultative cover. We are benefiting from the fact that, during the approval process of their business plans, several syndicates had to make concessions and reduce their stamp capacity for 2019.
What has been helping us as well is that the way we produce facultative business has become more competitive. We have managed to significantly reduce our own cost base while growing the business. Our admin and acquisition cost ratio has gone down, so the relative competitiveness of facultative versus treaty has increased.
How has the distribution of your client base changed in recent years?
Looking at our portfolio, one third of it stems from the top 20 large global insurance companies, and about two thirds come from regional and national companies in the EMEA region. This second area has remained stable in terms of fac buying. The total spread of global carriers in our portfolio has remained the same, but the composition within this segment has changed quite dramatically – shifting from local decentralised spot fac to facilities and net retention protection and so on.
Increasingly, there is more of what we would call solutions-driven facultative buying – providing additional services to our clients in terms of technology and risk engineering, where the clients’ main buying motivation is not the capacity as such but the service, and where we are being remunerated by the placement of the risks with us.
What we see as well in terms of buying behaviour, in relation to the distribution channel, is that the lines between fac reinsurance brokers, treaty brokers and wholesale and retail brokers are getting more blurred. We are often approached now by retail and wholesale brokers directly for facultative placements.
And then there are more MGAs or affinity groups approaching us directly. Obviously, they are aware that there needs to be a primary carrier between them and us as the reinsurer, but they have discovered the facultative reinsurance market and, from that perspective as well, we are seeing an increase in demand.
One of the fac market’s key strengths has been its capacity for innovation. How is that innovation evolving?
We try to reflect that in the way we work. So, for example, we are drawing our treaty, solutions and facultative departments closer together so that we are fully aligned in our goals and incentives to allow our people to be “solution neutral”. We don’t care at the end of the day if we label something “facility” or “facultative” or “treaty” – we try to just best match the needs of our client, bringing together the skills and expertise which are required. Often you need both – you need treaty underwriters/actuaries to look at it from a portfolio perspective and you also need the single-risk knowledge.
We have also merged the profit centres in EMEA, so that facultative and treaty underwriters are writing onto the same profit centre to avoid internal competition.
But we also see the facultative segment as a driver of innovation, because it’s where we can test things on individual risks before we offer it in the form of treaty capacity. We have even installed a formal framework, called “Controlled experiments”, where our external business partners and our underwriters approach us with proposals for new product ideas which flow through that framework. We can then try it out in a controlled way for the next few years with a calculated downside, and then after three years we can decide whether we kill it or if we replicate it and make it grow.
Technology is obviously playing an ever-increasing role in different areas. One is the risk area where, due to new technologies, the landscape is changing and we see new forms of exposures – the most prominent one being cyber. But technology is also used to mitigate risks – for example, sensors to detect fire, water and so on.
We also use technology more in sales and placement. We have our Swift Re platform, for the underwriting and placement of automated business, and obviously all the brokers have developed their own platforms. In some cases, we are linking and integrating our platforms to theirs, so it’s only a question of time before we have an electronic marketplace for facultative risks.
Swiss Re has also developed a tool to read wordings and slips and compare them with the previous year’s wording and highlight changes, as well as comparing them with a database with more than 30,000 clauses, giving a rating to these clauses.
Fac has been viewed as a highly transactional product, where the underwriters’ knowledge and experience are paramount. What will be the key skills for fac underwriters going forward?
We looked into this strategically under the heading of “The underwriter of the future”, trying to develop that profile over a five-year time frame, and looking at the gaps within our existing underwriting community.
There are obviously areas where we are currently very strong, and which we will need in the future – all the technical and legal expertise, as well as the relationship management part. But we decided on six areas that we need to develop, both for hiring new underwriters and developing existing underwriters.
One is technological savvy. The second is financial acumen. Fac underwriters tend to be very technical from a natural science perspective, but more financial acumen is more important to see the impact of peak capacity – for example, on capital costs and volatility and so on.
The third area is origination and sales. In the past, a fac underwriter could sit at his or her desk and just wait for the submission to come in. Now it’s more about going out and talking to brokers and clients – what we call the “needs development” part. Often our clients don’t have a facultative need as such, so we develop it together through this origination process.
The fourth area is portfolio underwriting, monitoring and steering. Typically, fac underwriters are very single risk-oriented and as our clients are buying more bundled risks we need to combine this single-risk view with the portfolio view.
The fifth area is what we call deal team leadership and project management. In the past you would receive a single-risk submission, one underwriter would look at it, quote it, send out an offer, negotiate it and then the deal is done. Now, it’s typically tailor-made and more complex – you need to involve actuaries, risk engineers, treaty colleagues, and so you need very stringent project management and deal team leadership skills.
And the last one, which is very much related to that, is teamwork. Fac underwriters in the past very often worked alone, in silos. There are fewer risks nowadays that you can do on your own. So it’s not realistic to try to create a “super-underwriter” who will have all these skills. It’s more important that, as an organisation, we can cover it together, working as a team.
Where do you see new opportunities for facultative business in the near future?
Cyber is the most prominent one. Many of us compare it with what happened with directors’ and officers’ maybe 30 years ago. There was a lot of talk about it at the beginning – a lot of hype, a lot of uncertainty – and also significant challenges for us to cost it and model it, and it’s a process.
We are really seeing an uptick of demand now. Limits are increasing and we are growing with that. It’s still a small part of our portfolio, but currently it’s like a bubbling spring, with very fast growth of the exposure, year after year. Still, we have to take a cautious approach due to the accumulation risk, which can be enormous.
In terms of materiality of risks, the second one is non-damage business interruption, as well as contingent business interruption. These are difficult to model because global manufacturing processes are so closely interlinked, with so many dependencies. There is increasing demand from our clients and we are dedicating significant amounts of time and resources to developing that.
And a third area where we see a lot of development is parametric solutions; areas which again might be difficult to model, where we might not have loss experience, and where you then go to a trigger- or index-based approach.
We have been providing coverage for French skiing resorts, which are linked to numbers of days of snow in the resorts. If the number with days of snow in the skiing resorts falls in one season below a certain threshold, they get a pay out.
There are still some questions around regulatory recognition of these products in certain markets, but it is an area where we see significant demand.
We are talking about the renaissance of facultative business now. It has often been said that facultative is going to go away, but right now we are again in a phase where facultative is at the top of the agenda of many of our clients.
It’s a great moment for the fac market overall and we need to take advantage of that by being innovative and proactive and by proving the value of what we are providing to the larger economy and society.