People have short memories when it comes to nat cat loss events, but it’s the broker’s job to make sure they are educated about the risks and all the potential coverage options so they can make an informed choice about what they need.

This is the view of Cynthia Cui, executive director at Howden Specialty Asia-Pacific, whose team has a strong focus on facultative (fac) reinsurance.

Her comments came as she discussed the challenges of the international property market in Asia-Pacific. She says the region has a few nat cat-exposed territories, but that in the past two or three years there haven’t been as many nat cat events in this region, which has lulled people into a false sense of security.

Cui describes the current international property market as a lot more complicated than the traditional concept of a hard market might suggest. She pointed to an unavailability of capacity, a multitude of new risks and the “interesting dynamic” between treaty and fac insurance that is fostering greater market uncertainty.

There is a big challenge around reinsurers withdrawing capacity when they don’t get satisfactory renewal terms, she says. This situation has been exacerbated in the past few years by the Chinese market pulling out capacity from international business.

This lack of available capacity is prolonging the negotiation process for brokers trying to secure cover for their clients, she adds.

“Some deals are closed at the very last minute with prolonged negotiation even post inception. And in order to achieve maximum premium savings, many clients are buying less coverage, some opt for ‘co-insurance’ option, and some even choose not to buy insurance. This is quite concerning.”

Part of the issue, from Cui’s perspective, is that some insurers/reinsurers are too focused on pricing adequacy and profitability. “They don’t pay enough attention to whether clients get adequate coverage. Sometimes, they focus a lot on whether they are making underwriting profit, but they forget that the clients, the insureds, are also under huge pressure to save costs in today’s complex operating environment. Clients do not have an infinite budget for insurance.”

This is where the broker’s role is very important, because insurers don’t always think from a client’s perspective.

“It’s a broker’s job to work with as many markets as possible and provide clients with as many options as possible. We should be mindful of giving clients enough advice, including whether they are buying enough coverage, and what the risks and potential problems are if you don’t buy enough coverage.”

Understanding the balance between cost and coverage for clients is also essential, she says. “It’s our job to give clients enough options so that they can decide on the best solution for them.”

The fac/treaty dynamic

Cui is clear that fac and treaty markets are “very connected” and explained that they have a very interesting dynamic in some markets. “This situation is creating a lot of uncertainty around insurance coverage and pricing for the international property line,” she says.

Cui’s team is also seeing “more restrictions on cover in the fac reinsurance offerings”, which is being driven by treaty arrangements.

“When a market’s treaty has excluded certain coverage, their fac offerings will reflect the same restrictive covers,” she says.

Examples of commonly seen exclusions are cyber and data, communicable disease, sanction/territorial exclusions, war and terrorism, and political risks.

“Those standard exclusion clauses and wordings are a kind of template to a lot of the fac placement nowadays. Sometimes clients think these clauses and wordings are negotiable. But nowadays, when it is rigid on the treaty side, it could become a huge issue on the fac side—a deal-breaker at times.”

This market dynamic makes it harder for brokers to negotiate or manage client expectations. “When the treaty market continues to give the hardening message, clients/cedants sometimes come to the fac market still expecting terms to be soft. We can’t expect clients to understand how treaty and fac interact,” she explains.

There is an education process that brokers work through but it can be a “challenging and lengthy process”, particularly as clients are facing increased costs, inflation, and all the same profitability issues as everyone else.

“Clients are trying to make as many savings as they can but the market is still being driven by profitability, so they don’t want to give any reductions. Ultimately, clients are retaining more risk, because they don’t have budget to pay for more insurance cover.

“The client might also reduce coverage, so they may have a reduced nat cat policy limit and then have to increase the deductibles to make savings.”

The big question is how sustainable is this situation? “I don’t think it is sustainable.” Cui concludes.

Cynthia Cui is executive director at Howden Specialty Asia-Pacific. She can be contacted at: [email protected]