The Fac Files - Don’t decline that WC risk yet
In my July blog, I discussed the various ways that Fac can be used to “carve out” a more vertical exposure within an otherwise docile risk. This month I’ll delve further into how and where Fac can be strategically used within Workers’ Comp to write an account you might not have written otherwise.
Often, a Workers’ Comp policy generates the largest premium of the various casualty lines a company writes. As such, it may frequently be placed first and the other casualty lines may follow. Given the size and complexity of the WC marketplace, it’s not unusual to encounter within a single risk a small minority of employees whose work might be more hazardous than that posed by a typical employee.
One response to such risks is a simple declination. While this certainly avoids the increased cost of any possible severity risk, it is important to remember that a declination is not without its own cost - opportunity cost. If, for example, a WC risk is declined due to the greater severity associated with 5% of the insured’s employees, the true COST is the other 95% of the account premium NOT written. In addition, that opportunity cost might also include the lost Auto or GL premium, which might likewise have gone to the WC carrier.
An alternative approach is to use Fac strategically, where as an underwriter, you can have your cake and eat it too. Buying Fac to protect yourself only from the severe losses introduced by 5% of the employees (a “carve-out”) allows you to write the other 95% of the WC premium and puts you in a better position to write the Auto and GL as well.
We frequently provide WC reinsurance on exactly this basis. Some recent examples include scuba divers, pit crews (for car racing,) exterior window washers, and most commonly Industrial Aid Aircraft (where we reinsure only losses arising from an owned aircraft used to transport employees.) In each of these instances, our client was able to protect itself from much of the increased exposure associated with these more hazardous activities, but kept all the rest of the premium from all the other exposures.
When Fac is used strategically in this way, it bears fruit tenfold since it helps a cedant write not only the WC policy itself, but also some of the other associated casualty lines. As I suggested in last month’s blog, before you say “No” on a given WC risk, be sure to check with a Fac specialist first.