Insurers are increasingly looking for innovative ways to manage underwriting, buy risk protection and shore up capital. As market pressures evolve, they’re requesting risk transfer solutions that go beyond traditional forms of facultative or treaty reinsurance into the realm of hybrid solutions.
Hybrid reinsurance solutions that draw on the provisions of both facultative and treaty are better aligned with the coverage insurers’ offer insureds, according to Jeff Fleming, managing director, Guy Carpenter. They can offer “free and unlimited reinstatements; no occurrence caps; pay-as-you-go premium; exposure rated pricing; and the potential to improve treaty terms and to utilize facultative purchasing strategies more efficiently,” he said.
Fleming heads up Guy Carpenter’s Hybrid Solutions unit, which was set up seven-years-ago to address the gray area between facultative and treaty reinsurance. While alternative reinsurance solutions have been around in the direct market for quite some time, Guy Carpenter saw an opportunity to bring alternative solutions to the broker market – a move that has resulted in a boom in requests for hybrid products.
“What we’re tyring to do with Guy Carpenter Hybrid Solutions is bring up-front terms and conditions to the reinsurance market,” Fleming told Insurance Business. “Whereas with top layer excess of loss reinsurance where you have to pay a minimum rate online, with up-front solutions you can pay as you go for the exposure that’s linked to the coverage.
“Of course, there are some limitations. For example, nobody at this point is going to give free and unlimited critical catastrophe coverage, so there are still going to be potential coverage gaps. After a couple of very active catastrophe seasons, companies are looking to buy catastrophe coverage more efficiently. What we’ve done in response to that, is produce a full-fire all other peril sideways cover that protects insurers against all non-critical catastrophe events. I think companies see a lot of benefit to that, and they can adjust their catastrophe risk programs accordingly.”
So why should insurers buy a hybrid reinsurance solution as opposed to the more traditional facultative and treaty options? Facultative and treaty solutions have a countercyclical relationship, according to Fleming. The treaty market aligns with clients retaining more or less risk depending on the market environment. Over the past couple of years - especially post-hurricanes Harvey, Irma and Maria - insurers have retained more risk and have used facultative reinsurance to effectively buy down their catastrophes and protect themselves against future events.
Both facultative and treaty reinsurance can be burdened with a number of inflexibilities that limits the utility to many insurers, particularly for those lacking economies of scale for treaty purchasing. Insurers often chose facultative over treaty because of its freedom and flexibility to cede risk based on their overall risk management strategies. However, facultative reinsurance can be very burdensome because you often have to issue a policy and certificate for each and every risk.
“At Guy Carpenter Hybrid Solutions, we’ve tackled that administrative burden by developing an online platform that clients are able to use to effectively administer the cession of business,” Fleming commented. “We’ve automated the purchasing platform on a facility basis and have made it so that contract terms and conditions are set up-front. The underwriter can access the online platform from any internet-connected device and the market can see a risk on any given day to see what business has been ceded to a contract.
“The goal we had when we created this was to be an all-encompassing consultant / broker for our clients. We have the treaty side and the facultative side, we now have the facility side to take into account all risks and all exposures that our clients have. We’re really a one-stop-shop for reinsurance needs.”