Placing facultative risk in a tight market

In a soft market a mediocre facultative submission still gets placed; capacity is chasing premium and the underwriter fills in the gaps. When capacity tightens, the same submission goes to the bottom of the pile — not because the risk is bad, but because there is a better-documented risk on the same desk and the underwriter has finite time.

Most of the work of placing a difficult risk therefore happens before the first approach to market. What follows is what we put together on a complex facultative placement, and why each part earns its place.

The risk, described the way an underwriter reads it

Occupancy, construction, protection and exposure — in that order, with specifics rather than categories. “Manufacturing” is a category. “Injection moulding of automotive components, two production halls of non-combustible construction separated by a four-hour-rated wall, sprinklered to FM Global standard” is a description an underwriter can price.

Where a survey exists, it goes in. Where recommendations from a previous survey were outstanding, their current status goes in too. Silence on an open recommendation is read as a negative answer, and correctly so.

Loss history that is actually informative

Five to ten years, with each loss shown as paid, outstanding and incurred, dated, and — critically — described. A large loss with a clear cause and a documented remediation is far less damaging to a placement than a similarly sized loss that appears in the record with no explanation.

Where the loss record is genuinely clean, say so explicitly and confirm the period covered. An unexplained gap invites the assumption that something is missing from it.

Values that reconcile

Sums insured, estimated maximum loss and the basis of valuation must be internally consistent and consistent with whatever was submitted last year. Where values have moved substantially, explain why — indexation, capital expenditure, a revaluation, a disposal. Unexplained movement in declared values is one of the fastest ways to lose an underwriter’s confidence in the whole submission.

If there is a business interruption element, the indemnity period and the rationale behind it should be stated. A twenty-four-month indemnity period on a plant with a single long-lead-time machine is defensible; the same period applied uniformly across a schedule is a red flag.

A structure, not an open request

Approaching the market with “what can you offer?” invites the least attractive answer each underwriter is willing to give. Arriving with a proposed structure — attachment, limit, share sought, target terms and the reasoning behind them — sets the frame for the negotiation and signals that the placement has been thought about.

It also makes the placement easier to complete. Underwriters taking a following share want to know where the line is being set and by whom; a submission that reads as coherent gets a lead more quickly, and the lead does much of the work of filling the rest.

The right markets, approached in the right order

Distribution is not a broadcast. Different markets have genuine appetite differences by occupancy, territory and size, and a scattergun approach produces a trail of declinatures that follows the risk around the market. Approach the markets with real appetite first, secure a lead on terms you are prepared to complete on, then build the placement out.

Where this leaves pricing

None of this makes an underpriced risk placeable. What it does is ensure that the terms offered reflect the risk rather than the underwriter’s uncertainty about the risk — and in a tight market the loading for uncertainty is the larger of the two.

The same discipline applies to modelled exposure on catastrophe-exposed risks; see five questions to ask your catastrophe model for the analytical side of the same argument.

If you have a risk that has proved difficult to place, send us the details — we will tell you honestly whether we think there is a market for it.