Missed the boat?

The facultative market in Bermuda is growing and thriving but the Class of 2005 may have missed out on a big opportunity by concentrating on treaty.

Fac came to Bermuda in full force after the 11 September terrorist attacks in 2001, when the Class of 2005 saw a gap in the market. However, this time round, the group of post-hurricane Katrina, Rita, and Wilma (KRW) start-ups have failed to set up Fac operations.

The gap in their planning has been made more obvious by the success of Ironshore, set up by the King of Fac, Les Rock, who has been rattling out business - and rattling Bermuda cages at the same time.

"The Class of 2001 certainly identified facultative as an opportunity," said Elliot Richardson, president and chief executive officer of Aon Re Global Fac. "Fac was starting to grow in prominence and certain companies definitely spotted the Fac opportunities; not all of them, but some of them."

These companies included Allied World Assurance Company, Montpelier Re and Axis.

"When you look at the Class of 2005, I would actually say that they did not spot the opportunity and, in fact, I don't think there was a single new facultative start-up of the post-KRW group. That was definitely a miss."

One of the problems with setting up a good facultative division is finding the right underwriters to write the business. All you have to do is look at the slew of court cases when it comes to stealing away Fac teams. Bermuda-based Arch Reinsurance Group recently set up Arch Re Facultative by luring away Steven Franklin and his team from the property facultative unit of General Re. Despite this coup, however, in May, a state court judge issued a restraining order against Arch Capital Group and four former managers of General Reinsurance Corporation, who left to join Arch. Court documents say Gen Re is alleging the managers "plotted to sell to the highest bidder the Gen Re business for which they were responsible". Apart from Franklin, the others named are Jennifer Apgar, Philip Augur and Kenneth Vivian, and Gen Re alleges that in April they orchestrated an "en masse departure", which included 26 other Gen Re employees.

Juicy legal action

Equally juicy was when Benfield's Fac division lost senior members of its team to Aon - led by Mr Richardson himself - and resulted in a £9.5m ($19.1m) payout and GC Fac's management defection to new brokers Integro, which is also still subject to legal action.

This shortage in the labour market, and the difficulty in setting up good teams - let alone getting them out of their present offices, through gardening leave and then through the long and convoluted work-permit process in Bermuda - has put many companies off.

However, if companies like Ironshore, which set up in 2006 in Bermuda, are anything to go by, there is big potential out there in Fac.

"I think people thought that there is such an opportunity in treaty, that they decided to underwrite from the island, rather than, say, set up a London contact office, " said Mr Richardson. "That group largely concentrated on the treaty book, which is why a lot of that group are now looking to expand by buying into a Lloyd's syndicate, really to get the expertise and the paper."

Mr Richardson, who heads up a team of 400 staff who work purely on Fac, said that their offices in Bermuda are inundated with Fac work, with 42 offices sending in their business to the island.

"In the past 18 months we have seen an increase, even from non-traditional facultative writers," he commented.

He said this was the result of the emergence of facility Fac and analytical Fac plus the emergence of Ironshore.

"That certainly makes a statement that Bermuda is a strong facultative market," said Mr Richardson. "I would say Bermuda is a natural Fac market because they like writing reinsurance business. On the retail side of the business - the direct side of accounts - there is enough capacity. If you look at the large accounts, domestically and in London, then perhaps Bermuda has had to evolve slightly differently to more of a Fac market than a direct retail market."

Mike Papworth, the London team leader of Benfield's facultative solutions team, said his team has seen growth in the Fac market in Bermuda.

"The big change we saw in Bermuda was after 11 September 2001. Companies like Montpelier Re and Axis, started writing Fac. It was then that Bermuda became a market for us."

He said, however, he would not necessarily agree that it has grown that much over the past two years, and increase in the use of Fac is not exclusive to Bermuda.

"We have seen Montpelier Re, who have now set up a Lloyd's syndicate and they were a purely Bermuda-domiciled company. That would seem to indicate that they are putting up a Lloyd's vehicle to access the non-US business, and they will leave the US to the Bermuda office. That would seem to indicate that Bermuda is cutting back a bit on Fac.

"We know that Allied World, because rates are coming down heavily in the US, are quite naturally pulling out of that business slightly.

"So, I wouldn't say there was any massive growth, I would say it is fairly steady. It is a market that set up in 2002 and we now see it as a feature of the marketplace." He added that most major business in Bermuda had a Fac unit and would write the business.

Papworth added: "What happened after 11 September 2001 was seen as an opportunistic venture into Fac by Bermuda, and in reality, it has become a feature of the market. We now have Bermuda as an established long-term Fac reinsurance market."

A growth in the market

Ratings agency Standard & Poor's has also noticed an increase in the use of Fac in Bermuda over the last six years.

"It is a fair point (to say there has been growth in the Bermuda Fac market)," said analyst Damien Magarelli. "Fac means that the policies can be written in a more specific manner, targeting specific exposures and risks and buildings versus treaty, which might encompass a portfolio of property. So, the point about Fac increasing is a fair point.

"We have seen an increase in writings of property facultative as well. We have also seen people writing a lot of treaty business. Part of this is the fact that, following 2004 and 2005, in the US there was demand for the coverage after the hurricanes. Companies provided property, so they provided some more treaty but as well some more property facultative."

He said with Fac there were more customer-service-related issues and it can require more infrastructure because it is very specific.

"It can be somewhat esoteric in terms of the risk that it will cover, so in that sense I would agree that it is a line of business that requires a significant amount of expertise and structure behind it," said Mr Magarelli.

He added many companies in Bermuda already offered facultative reinsurance and, if there were restrictions in terms of the size of Bermuda and the number of workers available, he said many companies had operations in the US, Asia and Europe where Fac might also be written.

"Companies may choose to write more Fac because their business and their exposures can be more defined specifically as to their risk management," added Mr Magarelli.

He added: "Fac is definitely acceptable, it has been written for decades. Is it more acceptable now? What I would say is that, as companies grow and develop their own operational and infrastructure, they may have more of an ability to write facultative. So, I think increases to Fac will probably trend along with the operational improvements and enhancements that companies may make as they grow their business."

Jim Bryce, chief executive of IPC Re, is more sceptical that Bermuda will ever be a Fac market.

"Facultative is very difficult in Bermuda, which, as you know, is an expensive place," said the industry veteran. "Facultative is a very expensive type of insurance. There is a lot of paper, a lot of endorsements. You get a lot of changes where there is no premium, there are a lot of changes where there is return premium, so I would venture to guess Bermuda is a bad place to do facultative. I think the London market is probably a more efficient place."

When asked about the existing Fac being written on the island, he is not sure if it is sustainable. "I don't think the expenses have hit them yet," he said. "It will be probably five years before you get the full impact of processing and, of course, the documentation of facultative, a lot of these difficult lines to write, these are all manuscript forms.

"So, it is not like you take out a page and you slap some clauses on it and then you have got an insurance policy on it, these things are very difficult.

"I guess following 11 September 2001, where you had a multi-billion dollar twin tower, with only pieces of paper and they didn't match (it would work).

"I'd say facultative is very labour intensive, you can use electronics, but you have got to read these policies. You have got to have lots of pieces of paper, you have got to have a lot of storage, and Bermuda is not a place to hire lots of people to write contracts, wordings and for storing lots of paper. We will see over time if it works but we won't know for years."

Brimming with potential

Mr Richardson was a lot more optimistic and thought it was already established and brimming with potential.

"I think it is a long-term market," he said. "If you look at the 2001 group, they are still going strong, have come through some major events, and they have definitely got a stronger position. And I think they are in the game for the long haul."

He said that maybe some of the companies that have bought into Lloyd's syndicates - and some are rumoured to still be looking - will not write the facultative from the island. However, he adds many will still do so if they can attract the right people to the island.

"London is probably the biggest crossroads of facultative, it is such a big market that gets so much coming in, and so it is important that they continue to try and attract the right people, and why would someone give up a good position in London to move to Bermuda?

"That is why I think Ironshore is a good market - to show people that you can underwrite it, and underwrite it well from Bermuda. It is the non-traditional way of doing things. They are writing it like a London-style market, which is great for the brokers because you get fast turn-around times and that is key to us, for our clients as well, and it is quite exciting.

He added that there is a lot of potential for growth in the Bermuda Fac market: "There is definitely room for growth, the Fac market continues to grow and the major clients are looking to purchase more facultative. It is definitely a burgeoning market and Bermuda is going to continue to look for opportunities. They have got a lot of capital, why wouldn't they?"