The Fac Files - “Fac” is not a 4-letter word
Facultative reinsurance is a very effective tool that enables underwriters to grow their business by allowing them to write accounts they might not otherwise have written. Similar to using deductibles, endorsements, exclusions, or sub-limits, it is simply one tool of the many tools in an underwriter’s toolbox that might be used to improve the acceptability of a risk.
We often hear from ceding companies, “If a risk isn’t good enough for us to keep all of the exposures, we shouldn’t be writing any of it.” It’s important to remember there’s a very big difference between a bad risk and a good risk that has a severity potential. A bad risk is one with few or no controls and lousy losses. A GOOD risk with severity potential likely has good management and controls and acceptable losses, only if something DOES happen, given the nature of the operation itself, it’s more likely to a LARGE loss.
As a direct reinsurer, we take on the risk along with our clients, so we certainly don’t want bad risks either. But if we can help hedge the bet on the GOOD risks that happen to have one or more severity-driven exposures, that may be enough for an underwriter to successfully write all of the account, which might otherwise have been declined or lost to a market that could provide ALL lines. It is true that fac does not make a bad risk good, but it can significantly diminish the exposure to a large loss on an otherwise good risk.
One way we often help cap exposures to large losses is by “carving out” certain risks. This means that our insurance clients can retain all of the exposures that do not have a severity potential and reinsure with us only that subset of more severity-driven exposures. Some examples we see every day include fuel trucks, school buses, or truck tractors in auto, or pools, water slides, special events, or even scheduled products in GL. Similarly, we can carve out a single line of business, such as the auto-only within an umbrella, or the liquor-only within a GL policy. In so doing, Fac helps you to responsibly write an account you otherwise might have declined.
Fac is anything but a 4-letter word when it caps or diminishes exposure to a large loss that would have made a risk unacceptable to an underwriter.