Have the recent challenging dynamics in treaty reinsurance also been experienced in the facultative sector, and are there any particular US-specific trends?
The facultative market is definitely experiencing some of the same challenges, and is affected by the same dynamics that we've seen in treaty.
In terms of US cat market, on the facultative property, there's increased pricing, and we can see pricing pressures on the facultative US casualty side of the market too. I would say that most of the challenges are probably due to the unique market environment in the US.
On the cat side, cover is harder to obtain or is priced higher than our clients might want to pay. Additionally, the courts opened up after Covid, and there have been a lot of ‘nuclear verdicts’, where pay-outs have gone up exponentially; for example, what would have been a $5m automobile claim a few years ago might now be a $50m claim. That is putting the facultative US casualty side under increasing pressure, and it’s something that our treaty-side is watching closely.
Has fac become even more important in helping treaty clients to build comprehensive risk transfer programs in 2023? Have inflationary and/or other pressures influenced fac buying?
Fac programmes are becoming increasingly important as our clients look to build their risk programmes. If they aren’t yet examining facultative solutions, our advice is that they should be. It’s been a growing form of risk transfer in the United States, and is only going to grow further, and as an industry we need to continue to drive increased collaboration between treaty and facultative areas in order to build a comprehensive plan for cedant companies. We are certainly doing that at Aon, using our global Aon United network to optimize capital and shape better decisions for our clients. Aon has always had a very broad facultative function, with specialists in a huge number of areas, including med mal, energy, construction, and captives, to name but a few. We have always aimed to build diversified teams in order to align to, and address, client challenges.
Where there were potential gaps in placements for cedents at 1.1, fac helped to fill the voids. For clients, fac is about diversification of strategy and risk management, where various sources of capital work together to achieve an overall better result.
In terms of inflationary impact, there has been pressure, especially on valuations in the property market. This has led to increased limits, which are required to satisfy what the ultimate buyer of insurance needs. Facultative has been hugely successful in providing the additional limits needed in our market.
Where are you seeing most demand for facultative products? Are there particular specialist areas where fac has proved its value the most?
Auto liability continues to be the number one purchased facultative casualty line in the United States, and I don't expect a decrease in demand anytime soon. There’s increased demand for auto carve-outs in umbrella layers to smooth out any potential future losses. This gives comfort to treaty players that they don’t have to navigate potential volatility alone.
Aon offers a number of tools to help our clients take advantage of fac capacity and develop a holistic risk management program. There is a perception that fac can be more expensive and time-consuming, but we help to smooth out the transactional nature of facultative in order that it doesn’t become a pain point for our clients. Our ultimate goal at Aon is to obtain the best deal for our clients at the best price.
As well as risk mitigation, can facultative reinsurance help clients to pursue growth opportunities?
It can be particularly useful if a client wants to enter a new area or line of business. A lot of times, treaty reinsurers do not want to participate in start-up areas due to the lack of balance in the portfolio or, again, due to pressure on limits. So facultative can be extremely useful in giving protection to the ceding carrier, while also being able to provide help with underwriting expertise.
What is your outlook for the January renewals from a fac perspective?
It will be robust. There will be segments that need facultative support in property, with treaty rates still increasing in some areas, although with overall greater market stability and in a more orderly manner. So fac can help to mitigate volatility for our clients. Casualty is likely to be a more challenging renewal market given pricing pressures, and while reinsurers will talk of price increases in certain lines, especially in the auto liability area, an intermediary and capital advisor can be particularly helpful to bring together a multitude of different carriers to satisfy the required limits.
In this regard, I am very positive about how Aon will be able to deliver value and shape better business decisions for clients in the approach to the January 1 renewals.
