Open to change
Santiago Hernandez, president, Arch Re Facultative
How would you describe the present environment for writing property facultative business?
We are in a transition period, there is no doubt. What is uncertain is the degree of change and, as always, the duration of that change.
Perception of risk, be that for an individual or a company, is a fickle thing. At the moment, the perception of (or respect for) certain risks is heightened due to recent loss activity.
For example, the exposure to wildfire has always been there, but the realisation of it as a major peril that cannot be ignored is based on the experience of the past two years. The question is, how long will certain people’s memories be in regard to that peril?
What type of occupancies do you feel offer the best opportunities currently?
To answer your question more broadly, we will underwrite any risk we feel we can understand. The inverse would be true as well. For example, terrorism and cyber (both man-made events) are perils in which we think it is quite difficult to assess the frequency and magnitude of events. We feel that in order to “understand” the risk, you must have a very high degree of certainty around those two components.
In regard to the best opportunities relative to pricing, that can be a dual-edged sword. “Good pricing” in the marketplace generally is the result of fear in the marketplace. And, as we know, fear is generated by losses. Our job as underwriters is to determine whether the losses are the result of process risk or parameter risk.
If we determine process risk is at play (i.e. sometimes losses happen to good accounts that are well priced) we need to stay unemotional and remember that, in the long run, those will be profitable opportunities for us.
If we believe parameter risk may be in play (i.e. our assumptions relative to frequency and/or magnitude are wrong), we need to reassess the situation and be open to the possibility that we need to change our thinking longer term.
Obviously, the analysis of process versus parameter risk is a tough one, which is why we stress collaborative decision-making at Arch Re Fac.
What territories are you focused on now and where might you expand your reach in future?
We are focused on clients in the US, Canada, Europe and Australia. If market conditions were to improve in other parts of the world, we would certainly be interested.
What is your level of appetite for writing programme/facilities business?
Our appetite, whether it is for programme or individual risk business, is always driven by our knowledge of the underlying portfolio and how that interacts with market conditions. There are several lines of business we feel we understand very well, but the pricing, terms and conditions just aren’t there for us to play.
Thankfully, we work for a senior management team that takes a long-term view which stresses smart decisions ahead of premium volume. We know what happens when you get those two criteria in the wrong order, and there have been some recent reminders to us all in the marketplace – both in London and here in the US.
What effect has the cutting back of primary property business by major cedants like AIG had on facultative buying habits?
As discussed earlier, when perception of risk changes (i.e. losses), facultative purchases go up. The interesting thing is some classes of risk (recyclers, wood frame builders, wildfire-exposed accounts) have hit multiple players and therefore the market is more consistent in its response.
But we also see the opposite at play. For example, client “A” hasn’t had a loss in five years on “occupancy x” so they will keep more net, regardless of pricing, terms and conditions etc. Client “B” has just had a loss on “occupancy x” and now they are back to buying facultative on those risks, even though their pricing, terms and conditions would be profitable in the long run.
It’s interesting how much of our marketplace reacts to outcomes instead of decisions.
What are you expecting to see in terms of new business and renewal rates in the remainder of the year?
We have seen an uptick in submissions due to a reduction in client comfort levels. There have also been the recent departures of two competitors here in the US, which is driving up our numbers. And we are seeing rates increase as a result of the past two years, so it’s good news for our clients and the facultative markets.
We don’t have the luxury of disrespecting perils anymore. The wildfires of past two years are proof of that. Thankfully, we made significant adjustments to our wildfire approach following the lessons learned from 2017. While those changes were unpopular to say the least with our client base, we knew it was the right decision to make in the long term.
And, lo and behold, 2018 happens! Rarely do we get vindication in our business for making the right call so quickly.
What other issues concern you at present?
I will answer you in the same way we have answered this question internally. We can’t know exactly what the industry/marketplace is going to look like in the next one, three or five years. Nobody can do that.
But what we can do is remind them of the foundational qualities we have that will ensure our ability to outperform the market, regardless of the specific changes we will encounter: our culture, our emphasis on collective knowledge, our openness to change and, most of all, our focus on maintaining an environment that is professionally and personally reward