Clients who may have forgotten the benefits of facultative solutions are becoming re-acquainted with the market’s depth of expertise and knowledge, says Jeff Saper
Jeff Saper, CEO, Pacific, Guy Carpenter
What does your role as managing director of the Sydney office of GC Fac cover in terms of territories and classes of business, and what would you identify as your core business areas?
As head of casualty facultative for Asia Pacific (APAC) and CEO of treaty and fac for the Pacific region (appointed 1 January 2020), my geographical remit primarily spans Australia and New Zealand, as well as the Pacific islands.
In terms of classes of business, on the facultative front these include all financial lines, general liability, government business, property, construction, marine and energy.
In terms of our core business areas, in addition to these lines, over the past four years we have increased our focus on the use of facilities in APAC. These have gained significant traction not only in the Pacific region but also across the rest of Asia.
Prior to re-joining Guy Carpenter in 2014, you had a strong grounding in casualty facultative for the South East Asian market. How would you describe that market currently?
At present, I would say that there are two market environments in place in the casualty market in the APAC region. There is clear evidence of a significant hardening of the market in Australia and New Zealand, while rate developments in South East Asia are fairly stable at present, with loss-affected layers increasing.
How have the property and casualty fac markets generally changed in the past five and a half years or so since you took up the managing director role at GC Fac?
Since I joined Guy Carpenter in 2014 we have witnessed a number of changes across the property and casualty fac markets.
Previously, the majority of fac was purchased via gross fac to enable cedants to write larger line sizes. Today, it is primarily purchased as a means of protecting the cedant’s net retention.
Overall appetite for facultative cover in the APAC region remains strong, and there has been a continued rise in cedant interest in purchasing facultative solutions in recent years.
However, we have also witnessed a marginal reduction in reinsurance capacity in certain classes, and a challenging pricing environment in the property reinsurance arena, particularly in some specialty lines such as energy, power and construction.
In addition, we have seen an increased appetite from reinsurers to support facilities in order to secure greater premium volume, reduce administration burdens and improve account retention ratios.
What would you say are the most promising emerging risks for the facultative market in the region?
There are multiple areas – both in terms of emerging and expanding risks – where we see growing opportunity for the use of facultative solutions.
These include areas such as Side C directors’ and officers’ liability and financial institutions, trade credit/surety, single project professional indemnity, intellectual property, environmental impairment liability and cyber lines.
Before joining the facultative team in your previous role with Guy Carpenter, you worked on treaty business. How would you describe the relationship between the fac and treaty markets now and how does this work in practice, in terms of the products provided to cedants?
Historically, the fac and treaty divisions operated as relatively distinct units. However, in recent years there has been much greater interaction between the teams to the benefit of the cedant.
At Guy Carpenter, we closely align our fac and treaty capabilities to enable us to create solutions that meet the needs of the individual cedant, whether that be a pure fac or a treaty solution, or a combination of both. This greater collaboration between the two departments has also contributed significantly to our success in the facilities arena.
What are your biggest concerns as a fac broker in this market – what keeps you awake at night?
As mentioned, we are seeing an increase in demand for fac solutions from our clients, which means the overall outlook for the sector is positive, and there are clear opportunities for growth.
However, there has been pricing disparity between the direct and facultative markets in recent years which has proved challenging and in certain classes we have seen a reduction in capacity – this is providing some cause for concern as we head into 2020.
The focus, therefore, is on ways in which we can create a wider market base to support this uptick in client demand.
And what do you see as the greatest strength of the facultative product in the current market?
There is no doubt that the potential provided by facultative solutions has increased, reflecting greater innovation and the highly professional nature of the sector. This has given cedants greater comfort in using fac as a means of protecting their portfolio.
It is fair to say that some companies had forgotten the benefit that facultative solutions provide as an underwriting tool both to remove volatility and to provide a second opinion on a risk – but that is changing.
The trend towards protecting net retention to avoid volatility has helped clients meet their internal objectives to protect the bottom line. For some, this has also helped with top-line growth when writing certain risks or classes of business.
Additionally, for clients writing a relatively new class of business, the international facultative market provides a deep pool of expertise and product knowledge to support their growth and diversification objectives.