Facing up to the Facs

Pricing of U.S. facultative property business at Lloyd’s is a tanker beginning to turn. After four or five renewals at lower rates, leaders in the U.S. facultative property market are declaring enough is enough.

by Neil Russell, ArgoGlobal Head of Property

This article was republished with permission from Insurance Day.

 

Syndicates in the Lloyd’s market, under pressure to improve their bottom lines, are starting to walk away from underpriced U.S. fac property business.

Pricing of U.S. facultative property business at Lloyd’s is a tanker beginning to turn. Most syndicates are putting a little less into their business plans for 2018, retracting somewhat to optimize their existing portfolios. The trend already is clear: after four or five renewals at lower rates, leaders in the fac market are declaring enough is enough.

The majority of the market’s book is underpriced. While most accounts can absorb the rate cuts already endured over recent renewals, a smaller percentage have insufficient margin to bear the historic reductions because they have become volatile.

Five years ago, with maybe 30 or 40 points more margin, the core sweet spot business ran very well, but so did this more poorly performing portion.

When recalibrating portfolios for 2018, accounts in the underperforming tier will receive underwriters’ focused attention. This smaller portion of the book has much less attractive margins and limited upside. Some risks will be re-underwritten. Others will attract higher retentions to make them sustainable. In a few cases, the market will walk away. It will be a refinement, a tweak, not a wholesale change.

Loss history and risk data

The fundamental problem has been too much capacity, and most of it will remain despite slightly lower budgets for the year ahead. However, one man’s meat is another man’s murder. Those of us who have been leaders in the fac space for many years have legacy, which provides loss history and risk data. Those underwriters can look back over five years or longer, see the cash in and out, and judge when we can no longer take money off the table.

Others syndicates are new to the line. Some started only last year. They have a different perspective, with fewer losses on their books. If you began writing U.S. fac in 2017, your view is likely to be different. Each deal is unique in terms of the people aligned to it, since everyone’s business plan is different.

If the rating environment for 2018 is flat, the market portfolio should be able to sustain it for the year, provided the portion of the book that needs to pay more does pay more. Loss-affected accounts in 2016 saw an average weighted rate increase of 12 percent in 2017. That trend will continue, whether under facilities, lineslips or a delegated authority.

Conversely, superlative accounts with no losses for five years will not see an increase, but are unlikely to achieve a rate cut for 2018. Already reductions have slowed from double-digit cuts to reach the low single digits. Our own book is trending almost flat for the year, in part through loss-making accounts in payback and in part through accounts that are truly flat. In some cases, the rate request, agreed by other markets or not, has been too great for our appetite after years of reductions. We are seeing a softening of the softening.

Flat market

I foresee that flat market materializing in 2018. Rate cuts will end as everyone begins to retrench and pull back their capacity. Some accounts, by default, will have to pay more to be placed. Perhaps 10 to 20 percent of accounts should pay perhaps 12 percent more, either because they are underpriced or they have had losses. With that achieved, as a whole on a weighted-average basis, underwriters may assume a rate increase across the portfolio of perhaps 2 or 2.5 points by the end of the year. Of course, we are early in the wind season and a major event would have an impact.

Barring such a loss, the slow turning of the tanker may mean some difficult conversations for our broker cousins. But Lloyd’s is now in a position where most syndicates are looking to retrench – to reduce their top line, improve the bottom line and get back to the core of the business. Of course, as a subscription market, every such conversation and decision affects 10 or 15 syndicates.

Many of those businesses may not recognize the true strength that fact represents – the strength of Lloyd’s. The market can sometimes succumb to being a victim of its own success. We do compete against one another, but if you realize your own strength as a Lloyd’s participant – and you have a leader everyone backs – then you are a lot more powerful than some of the large company markets that stand alone with their own capacity and have been very competitive, too. We must protect against divide and conquer within our market, sell our strengths and sing with one voice. If we adopt such a strategy, it will serve everyone, including pressurized brokers and clients reliant on having our strong market behind them.

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