FM stands for Factory Mutual – basically FM is a mutual insurance company with headquarter in Johnston, R.I., US. Globally, FM is known as FM Global, to some, it’s FMG. I have came across the FM Global’s Industrial All Risks’ (IAR) wordings (the Large & Specialised Risks’ (LSR) version) throughout the last three years, where making underwriting decision can be a real challenge. The FM Global’s set of IAR wordings is very difficult to understand; at least if you are “British-trained” (or inclined) underwriter…. In this context, you may find among others, the following very strange indeed 🙄 :
- Miscellaneous Unnamed Locations
- Time Element – although contains similarities to the usual consequential loss of profit, it made no reference to any indemnity period…. It makes things weird when Suppliers’ extension is replaced with DTE or dependent time element.
- The definition of “Occurrence” does not contain the “72-hours loss occurrence clause” (save for terrorism and earth movement) commonly found in most Malaysian insurers’ excess of loss reinsurance programme
- Land & Water contaminant cleanup, removal and disposal is covered – but usually the policy aggregate limit is relatively low compared to total limit of liability
- Earth Movement – term used that is wider than our usual earthquake and landslip & subsidence cover
- Ingress / Egress – sounded more like our denial of access clause in the consequential loss of profit cover
- Service interruption time element – surely makes “transmission & distribution (t&d) lines” related losses covered, but such t&d is a common exclusion in any treaty…..
- Soft costs – eg. in construction loan fees, commitment fees, carrying costs….
Despite all those widening covers, FM Global’s underwriting margin from the Malaysian markets has been good over the last couple of years. While underwriting margin is good but most Malaysian insurers were not able to participate in FM’s offerings… “Offerings” simply mean FMG risks somehow or rather must be circulated to the local market in compliance with Bank Negara’s JPI/GPI 22 (Optimisation of Local Risks retention) before taking them out officially to FM Insurance Co. Ltd. in Singapore. Technical survey report is usually not made available for any of the interested parties! It is an open secret…. that Jerneh
|“…most parts were wide but the real set-back is really about the terms & conditions of cover between what’s offered by FMG and those permitted under the usual treaty terms – they just cannot be synchronised”|
and/or Etiqa would lead and issue the policy accordingly – not sure whether FM Global did provide them with any additional treaty capacity, which I thought would be a normal thing. Perhaps you can term this as a fronting arrangement…. it’s just too sensitive to say here, I will let you decide…..
The much wider coverage prescribed under the FMG wordings is a real set-back for most Malaysian registered insurers – those wordings were much skewed towards the other side compared to the usual treaty reinsurance programmes backing the insurers’ capacity. Perhaps “skewed” may not be the appropriate word – maybe we can us the phrase, “most parts were wide but the real set-back is really about the terms & conditions of cover between what’s offered by FMG and those permitted under the usual treaty terms – they just cannot be synchronised”. Even for the treaty leader(s) to grant any form of “special acceptances”, too require a sanction from their retro leader as well. Bear in mind, too many special acceptance, means a more costly treaty.
|“…(Ensure) no new and wider version be introduced….|
Anyway, things may be changing, especially when Scheme Manager (SM) nowadays has tendency towards tightening the screws on the wordings used by FM Global, so no new and wider version be introduced rendering almost or near zero participation from the Malaysian markets. Perhaps we can refer to another blogpost – “LSR Scheme Managers? Have you screen the policy wordings today?”
While the SM is doing just that, Bank Negara is also insisting that more premiums be retained within the country – optimising local retention… On the other hand, more foreign (treaty) reinsurers are now ready to provide some capacity for their cedants to compete for a small participating line of the FM Global risks – probably due to the good underwriting records over the last 5 years…. This does not augurs well for FM because their costs of conducting the engineering and technical risk assessment is not cheap, therefore a certain percentage of share needs to be retained in their underwriting books (ie. > 65%) to achieve an of economics of scale.
On the other hand, with the implementation of Risk-based Capital (RBC), things may have changed a fair bit – the fronting insurers may have some issues with the credit risk capital charges. FM Global, although with AM Best of A+, they are considered foreign reinsurer, which means a risk charge of 4% would be applied to any outstanding claims quantum, iregardless whether paid, quantum determined or otherwise. 4% can create a sizeable amount if there are a few large fire occurrences…. but also then, why incur 4% when you can get 1.6%!
|The number 18502 is perhaps their registration number prescribed by LOFSA, otherwise you can go buy 5-D for good luck during this Chinese New Year festivities….|
Perhaps all these may had driven FM Global towards applying for a licence (18502) from the Labuan Offshore Financial Services Authority in the Eastern part of Malaysia. This licence was approved a few days ago. The licence issued is in respect of reinsurance related only, ie. treaty and facultative, not as insurer. Still they would have to park back the FM risks to their usual fronting insurers – I supposed, there will be no changes to current arrangement.
Having said what was said, I actually quite like the FM Global’s business model, in which the product approach is more unique and collaborative, or partnership driven. The approach is to manage the complexity of insurance with simplicity from the perspective of the Insured. From the cedants, it is a straightforward arrangment, most if not all of the technical engineering requirements are worked out by FM Global’s engineering team with the clients.
Mutual insurance is “unusual” in Asia, and the model is not well-established in the region, compared with the United States and Europe.
One other thing that struck me was, FM Global does not really believe in having a pool of actuarial experts determining their pricing and risk exposures…., they preferred a large pool of engineers instead! They have more than a thousand trained engineers in various areas of expertise stationed all over Asia. Their surveys are more focus towards identifying exposure, including probable maximum loss (PML)…. and identifying risk improvement measures….. They are very focused towards risk improvements and continuous monitoring of the risks throughout the period of coverage. If the underwriters are satisfied with the risk exposure, they are prepared to compete… and very aggressively too! Historical database or intelligence to them is important but it cannot be more important when comparing to what’s lies ahead, ie. the accumulation of risk exposure. Perhaps they would towards calculating this exposure mathematically as well!
Now that they are officially on Malaysian shores, are you ready for a share? With a rate that is more than 25% to 50% lower than what you usually charge for the other form of LSR risks? On the other hand, are they ready to share any with you? There is no reasons for you to answer me here…… let’s see how things develop over the next 12 months.
We welcome FM Global and please do join the Malaysian party….. officially now, and why not! Let FM, Labuan be the center and heart of your Asia’s operations.