Inside FAC Profile: Malcolm Payton

‘Proper’ broking

Present market conditions mean fac brokers need to be more than just ‘postboxes’ and work harder to understand clients’ risks, says Capsicum Re’s Malcolm Payton

 

You joined Capsicum Re in 2015 to run the facultative reinsurance division. What were your ambitions for the division then, and how have those ambitions fared over the past (nearly) four years?
My ambition was to create a global facultative team that delivered the best service for our clients, and became the facultative broker of choice for global and local companies worldwide. This ambition has never changed from day one and has stood us in good stead in the ever-changing facultative market.
Our analytically based approach and ability to understand and respond to unique challenges have made us a trusted partner for customers and enabled us to produce new opportunities. We have built fantastic relationships in new territories from Latin America to the UAE, and with cedants we have never previously dealt with.
We started the team with a lean and knowledgeable base and over four years that team has doubled as we have continued to bring on outstanding brokers to service our ever-expanding client base.

How has the facultative market changed during that time, and how would you describe the current market environment?
In the past four years the market has changed from one extreme to another – swinging from being extremely competitive and accepting of, even promoting, multiple new areas of business, to now being a market where underwriters are looking to de-risk their books and will only consider risks within a strict appetite.
The positive outcome is that brokers now need to be ‘proper’ brokers. They need to go beyond being seen simply as postboxes who send an email to markets and wait for a response, by working with clients to truly understand their risks and advocate on their behalf to achieve the best solution.
Although it’s a much tougher environment to work in, it’s far more enjoyable and rewarding when you achieve and exceed your clients’ expectations.
I see things only getting tougher in the next couple of years as the market continues to move. Local markets are still strong but London is continuing to put pressure on pricing and rates, so there will be more pressure on London to remain relevant.

Where are you seeing the most opportunities at the moment, and what do you see as areas of opportunity in the near future?
We are seeing facultative opportunities on a global scale consistently of mainly cat-driven exposures but also tough risk types such as power, steel and energy-related risks.
The future will be more of the same but there will be more appetite to buy facultative solutions as the market continues to change and clients analyse their risk portfolios.
It’s up to the broker, in conjunction with the client, to create a strategy based on the products available and/or the prices that need to be achieved. The better the relationship between the broker and the cedant, the greater the opportunity to achieve a satisfactory solution for the client.
In the past 12 months we have certainly seen a number of the large headline Fortune 500 US risks – the old favourites – coming back to the facultative market looking to purchase solutions.

How would you describe your and clients’ appetite for non-traditional fac products such as hybrid solutions and facilities? Are you bullish about these products?
We have always been successful in creating non-traditional fac products, notably hybrid solutions for generic cat and/or risk solutions, and anticipate increasing demand for these products in the next few years. They offer a better solution for some cedants and reduce administration costs, yet still provide a consistent product.
Generally, we have seen these hybrid solutions in place for multiple years as there is more complexity required in setting them up in the beginning and clients like them. They form the backbone of our renewal book.
We are bullish about this area of the business because more reinsurers want to play in this space, writing portfolio exposures and/or grouping industry specialisms. This allows all parties to work together to develop a long-term strategy that benefits cedants and markets.

What, if anything, needs to change in the facultative space if it is to remain relevant in the reinsurance market of the future?
Consistency is going to be key. We have seen a number of syndicates and reinsurers pull out of the D&F space in the past 24 months. Hopefully, this has now stopped or at least slowed down so we can return to operating in a market where we can be certain about who our trading partners are and their commitment to the market.
It’s difficult knowing how and what markets want to write, and in which territories. I have never seen such a change in underwriting in the many years I have worked in this market; we are seeing excess of loss underwriters writing primary business and primary underwriters writing quota share.
We have also seen a number of markets pulling out of multiple territories such as Mexico and the Caribbean which has left gaps, but not necessarily the people to fill these spaces.
All that being said, we want and need the market to be profitable to ensure its longevity and relevance. There is an element of uncertainty currently so it is vital that all those involved in this market come together to work through these difficult and challenging times.

What are your ambitions for the Capsicum Re facultative division over the next four years?
Capsicum Re has undergone significant international growth, with offices now in New York, Bermuda, Miami and across Latin America, so we aim to continue our expansion plans overseas now we have established a firm footprint in the London market.
Vitally important is maintaining the culture and integrity of the current team. We have a massive opportunity in the next three to five years to be the alternative facultative solution provider to the other established larger broking houses. It certainly will be exciting and rewarding as we continue our developments in this space.