Adapt and survive
Ron Diaz, Executive Vice President, International Operations – Everest Re
Ron Diaz and Everest Re’s non-nonsense approach to facultative underwriting stresses the need to be both flexible and efficient in order to succeed in the market
You have been at Everest since 1991, and have overseen the facultative book since 2007. A lot must have changed in that time! How would you describe the transformation of the facultative markets over that period and how would you describe the current market environment?
The change from 2007 to today is highlighted by an increasingly competitive environment with continuous deterioration in pricing and broadening of terms. We witnessed a relatively profitable environment becoming unsupportable by 2017.
After several years of concerns that the fac market was generally rated to develop a combined ratio in excess of 100 percent, the losses of 2017 (punctuated by the Harvey, Irma and Maria cat losses) drove changes in the market.
Those changes were mostly in Lloyd’s but there were also withdrawals of capacity and restrictions implemented by other global (re)insurers. The facultative market began to improve by January 2018.
The “youngish” underwriters that entered the market post-9/11 finally noticed that it wasn’t only about production but also about disciplined underwriting.
Theoretically, there should be stability for a while – but whether it is for two years or five years is yet to be seen.
What are the stand-out areas of growth in the facultative market for you, in terms of specific geographies, types of clients and classes of business? And what areas have seen a reduction in business?
Facultative business as compared with treaty is much more transactional. Deals, business segments, geographies, and classes of business can become uninteresting rather quickly.
On an annual basis, retail brokers, ceding companies, reinsurance brokers and reinsurers are aggressively working individual risks with an effort to grow their respective portfolios. There are very short periods of time where the market in general, a line of business specifically, or a geography specifically, is clearly well-priced and has appropriate levels of terms and conditions. We can only hope that the lessons of 2017 are not quickly forgotten.
You write both property and casualty fac – what is the proportion of each as a part of your overall fac book and what are the main classes of business in each segment?
On a global basis, Everest Re is writing to a facultative split of 50/50. We would like to keep that proportion where possible. Although there is not a huge imbalance within the classes, we do have a good amount of energy in the property book and a considerable portion of financial lines in the casualty book. But, that said, we try to diversify throughout the classes as much as the market permits.
Do you still see strong appetite for individual certificate fac, or is the balance shifting towards more programme business, facilities and hybrid solutions?
We try to be flexible. As reinsurers, I believe that to succeed you need to be efficient. Some facilities and MGAs are too expensive to support. That said, there might be some value in programme business/facilities due to the type of business, the expertise, access to business, or simply quickness of building a portfolio that makes them attractive.
Some requested levels of brokerage and commissions simply don’t make sense given the level of profit that is in the deal. They are either not supportable or not sustainable.
Individual certificate fac, with the proper control of deductions/commissions, is usually the most efficient so long as your underwriters are producing the appropriate level of profitable premium per head.
Where do you see the biggest potential for growth in the future – again, in terms of territory, client of class of business?
Facultative business changes very quickly. When a market or product hardens, you see it immediately in the facultative placements. The opposite unfortunately is also true.
Specifically, I am not sure that anything that looks good today will still be interesting tomorrow. In general, emerging markets continue to outgrow mature markets in terms of insurance penetration and need for reinsurance support. Semi-new products such as cyber are obviously going to be in more and more demand as the risk increases and the realisation of the need increases. We will try to remain versatile and respond quickly to deliver a product where the opportunity presents itself.
What, if anything, needs to change in the facultative market if it is to remain a competitive and relevant part of the wider reinsurance market?
Normal economic rules apply to the facultative market. It will always become an option when it is the efficient and effective. When it is not profitable, reinsurers will withdraw. When it is too expensive or doesn’t satisfy the need, ceding companies will seek other options and move to other products.
Although options may be new, such as the ILS market, the process is not new and will continue. Those that adapt and compete well will survive.