As head of reinsurance buying at Hiscox, Rory Barker is a long-haul player with an unswerving commitment to group security
Rory Barker is practically part of the furniture at Hiscox, having been there for 18 years. He joined the company after Rob Childs, Hiscox’s chief underwriting officer, persuaded him to switch from reinsurance broking and to assist him with Hiscox’s reinsurance buying.
After leaving school and working for an underwriter for a year, Barker joined reinsurance broker Minet, which is now part of Aon, and later moved to Carter, Wilkes & Fane, now owned by Willis, until the call came from Childs.
While Childs handled the reinsurance purchasing, Barker managed the processing and operations. Following Hiscox’s purchase of its UK insurance company in 1996, the merger of its syndicates into Syndicate 33 in 1998 and Childs moving out of buying reinsurance, Barker relinquished his responsibility on operations to focus on purchasing, which he has done since. Just don’t ask him to buy facultative reinsurance.
Q: What do you most look for in your reinsurers?
A: The key thing is their ability and willingness to pay claims. The price of reinsurance or the breadth of coverage is meaningless if a reinsurer is not willing and able to pay our claim when it matters. I always tell our underwriters: “The three most important things about reinsurance buying are security, security and security.” At Hiscox we don’t compromise on the quality of security.
Aside from that, we are not too keen to trade with naïve reinsurers, as this is counter-productive in the long term. A well-known mantra at Hiscox is ‘no surprises’, and we want to deal with reinsurers that understand the exposures that they are taking on.
Q: Do you think we have entered – or re-entered – a soft cycle of the market?
A: Most of our business renews on 1 January. For 2010, there was a gentle softening of catastrophe-exposed business, with a somewhat greater softening in business not prone to catastrophe losses.
Overall, reinsurance rates are still adequate in most areas. Next year, who knows? If it is a benign wind season and the earth doesn’t shake, you would expect reinsurance rates to fall a bit, but everyone is using similar exposure models and we are operating in a pretty disciplined and efficient marketplace.
Q: How do you approach the buying and structuring of Hiscox’s reinsurance programme?
A: The overarching strategy for reinsurance buying is developed at a group level. We set our risk appetite, and reinsurance is just one tool to help us achieve the desired result at various points of the curve. It’s primarily placed to achieve the risk appetite that the group is comfortable with on a net basis, and the main driver of the result for us is the natural catastrophes.
One of the toughest jobs I have had over the years is to persuade the underwriting teams not to buy reinsurance down to the low levels they would like to. We have used a dynamic financial analysis model for many years to look at optimising our portfolio.
Around five years ago, we analysed all the areas of the business where we bought individual towers of reinsurance protection, and the conclusion was we were generally buying too low. We decided to increase our retention in many areas and to drop the lower layers of cover that had traditionally been purchased. This strategy has proved to be successful.
Q: How much reinsurance do you buy?
A: Reinsurance is the group’s biggest spend. We buy a significant amount for the syndicate at Lloyd’s, our Bermuda operation and our US business. We also purchase reinsurance via various ‘sidecar’ arrangements, where we essentially write reinsurance business on behalf of third parties.
Of the total reinsurance bill, around two-thirds is pro rata and around one-third is excess of loss. There is very little facultative reinsurance purchased and, in most cases, I would rather the underwriters didn’t write the business at all if they feel they need to buy facultative cover.
If the facultative reinsurance doesn’t respond – for example if there is a dispute – then our main treaties won’t pick up the loss because they don’t cover the facultative failure.
Q: How has the current pricing environment affected your reinsurance buying?
A: If the market softens or hardens, it may well change the amount of reinsurance we decide to buy or affect the level at which we set our retention, but it doesn’t change the overall process we go through or the strategic role of reinsurance within the group.
Q: How has the financial crisis changed your reinsurance buying strategy?
A: It certainly makes you acutely aware of counter-party credit risk and highlights the dangers of having too many of your eggs in one basket.
Hiscox has always had very stringent criteria on reinsurance security and, consequently, we have over many years outperformed the market in terms reinsurance failure and bad debt.
The financial crisis has magnified what we already knew. It was a timely reminder.
Q: How will Solvency II change the way you buy reinsurance?
A: It’s a little early to say, but we’re all going to be touched by Solvency II. We think that our DFA model is very robust, and assuming Solvency II makes no fundamental changes to that model, I don’t see much change to our appetite for buying reinsurance.
If all of a sudden the impact is that we need to keep more capital to run our business, then we, along with the rest of the market, would need to look at this.
Q: Describe your average day in the office.
A: I feel lucky to have a very exciting role, and my average day really depends on the time of year.
The job varies greatly: co-ordinating our reinsurance information packs (in liaison with underwriters); analysis of business plan numbers; talking to brokers about our plans and structure; ensuring the coverage we require is
in place before inception, which involves negotiation with brokers and reinsurers; benchmarking and presentations to the board and regulators, explaining how we did against targets and identifying what we could have done better; travelling to visit our reinsurers to review how the renewal process went; and identifying future opportunities.
Q: Who do you admire in insurance, and why?
A: There are a lot of people I admire at Hiscox at varying levels in the company, but I don’t intend to name names!
Outside Hiscox, how can you not admire someone like Warren Buffett? He can take very complex subjects and describe them very simply. His annual letter to Berkshire Hathaway shareholders should be compulsory reading for anyone in the industry. GR