Upheaval in the treaty reinsurance market has historically led to heightened interest in facultative coverage. As such, the prospects for the fac market heading into 2022 are buoyant, with shifting in price expected in the commercial auto, workers’ compensation and general liability sectors, says Sompo International’s Christos Charitos.

Christos Charitos – Sompo International

If some of the buzz we’re hearing is true, facultative purchasing is about to become more important.

As treaty reinsurance becomes more expensive and capacity harder to come by, facultative products provide an optional, discretional, non-obligatory alternative, meaning that carriers have the flexibility to choose very specific accounts or segments of their portfolio to reinsure. The ability to pick and choose becomes increasingly appealing as pricing gets high and capacity is restricted.

For carriers looking for solutions, facultative reinsurance can be a nice way to supplement or replace treaty support, depending on the situation.

The lines of business covered under Sompo International’s casualty facultative reinsurance practice include commercial auto and workers’ compensation. In both, we are seeing trends that are likely to drive pricing in the coming year.

Workers’ compensation, in particular, continues to be a very competitive marketplace, but those that are writing niche classes of business or are specialists are going to be able to weather the storm of competition better than generalists.

On the workers’ compensation side, it will be imperative that underwriters remain disciplined. It wasn’t too long ago that this line was upside down and carriers could name their price – which is no longer the case. Over the next several years, if underwriters are patient, they’ll see workers’ compensation get back to that. It’s been driving downward for too long and the cycle will turn. We just have to be patient and disciplined until that happens.

In commercial auto, the good news is that there’s momentum behind the pricing right now, which means that our partners can get more rate for the risks they are taking on. But the frequency of severity is rampant, and it unfortunately hasn’t gone away; there’s been frequency relief during the pandemic, but the severity has always been there.

The concern is that people don’t realize how quickly it’s bubbling back up. This may be on the mind of some of our carrier partners but maybe not on their radar enough, and risk selection must be on point and pricing must be adequate given these concerns.

Right now, the commercial auto rate environment is more fluid than we have seen in a while. Just a few months ago, because of the benefit of the pandemic, some of the larger personal auto carriers were reducing their rates. That has now flip flopped, and these same carriers are now taking significant increases.

Although Sompo International’s Casualty Facultative Reinsurance group does not write personal auto, this is an indicator for what is happening on the commercial auto side, where we are seeing meaningful increases – high single-digit to double-digit increases, with even bigger double-digit increases for harder classes and loss-impacted accounts.

Christos Charitos, Sompo International

This is going to make it tough to earn a meaningful return on commercial auto, however, disciplined underwriting and rate adequacy will help our ceding partners be successful in this line of business.

Another trend we are seeing is the increase in medical, social inflation and litigation costs around general liability (GL) – and all lines for that matter. This leads us to believe GL will continue to see increases over the next several years.

These trends go hand in glove with what we are seeing in the umbrella space, which is frequency in severity, and is driving up the demand and cost for capacity. Insureds are looking for more capacity and our carrier partners must be selective in providing it.

Underwriters, carriers, and reinsurers all need to be disciplined with capacity. Right now, there are a lot of question marks in the industry with where things are going, and we have to be disciplined with what we’re putting out in the market. Those who get caught putting out very long limits for questionable pricing are going to have a hard time in the long run.

Looking ahead, we believe that facultative reinsurance is likely to become even more important in the next 12-18 months.

If treaty gets too expensive, carriers will look to other solutions and keep more net. As carriers raise the retention, one option available to them is to lay off some of that risk with facultative reinsurance.

When a carrier purchases treaty, they’re giving away a very specific percentage of their written premium. In contrast, facultative reinsurance is non-obligatory and with its ability to protect the bottom line without eating up the top line, casualty facultative reinsurance may be just the solution our carrier partners need.

Christos Charitos serves as Vice President, Head of Casualty Facultative Reinsurance, at Sompo International