Umbrella coverages and rates feel the hardening market

Rough Notes, Jul 2001 by France, Larry

SPECIALTY LINES MARKETS

Read the directions. A bottle of Nytol sleeping aid warns: "May cause drowsiness." In like manner, umbrella policies now being issued should contain the warning: "May not have expiring coverage enhancements."

A trend not found in the primary levels at this point is reduction in capacity. Also many carriers are not eager to include all the "bells and whistles" previously found in last year's policies. Michael Vought of the Gulf Insurance Group states: "The reinsurance market has tightened considerably in the past six months. Several carriers have reduced their capacity. There are some new players so overall industry capacity has not changed much. However, as treaties renew there should be a further constriction of capacity. Rate increases in the 20% to 30% range are commonplace, with some classes such as trucking and construction seeing significantly higher increases. The industry has significantly underpriced auto, which has had a negative effect on many carrier results. There is also a trend in the market to eliminate much of the E&O coverage that was being provided by umbrella and excess carriers."

Even when carriers have ample capacity they are reluctant to use it in some classes. Also some of the upper layers of limits can be priced higher than even the second or third layers. Chances are, unless a treaty is in place for higher limits you will see more players involved in obtaining the total package limits. Minimum premiums are being adjusted upwards. In commercial umbrella and excess policies $750 to and $1,000 minimums are not as easily found as in the past.

John Edack, senior vice president of casualty for Westchester Specialty, part of ACE USA, points out: "The casualty marketplace continues to firm. This is true for both standard carriers as well as the E&S carriers. Traditional market cycle dynamics are holding true as witnessed by the expanded role of the wholesale broker in providing alternative solutions to current market conditions, which are characterized by restricted underwriting appetite and reduced capacity. Pressure mounts on all fronts to tighten terms and to provide less fringe coverage in the form of EPLI, pollution liability and miscellaneous professional liability. More umbrella and excess carriers are requiring higher attachment points, which is creating opportunities for the E&S markets to provide buffer layer coverage.

"The reduced capacity is creating shorter limit authorizations, which contributes to the increased pricing for layered excess programs," Edack continues. "The introduction of the buffer layer into insurance programs with a significant auto exposure is also contributing to dramatic price increases. Overall, rate increases of 20% to 30% appear to be the norm. In many cases these rate increases are incorporating higher minimum premium adjustments. As brokers scrabble to deal with price increases they are also being met with downward pressure on commissions."

Edack points out, "As the market continues to firm each quarter, certain classes are becoming more difficult to place. From an umbrella standpoint these classes include trucking risks, long term care, and products. More recently the marketplace is experiencing a tightening in the frequency driven classes such as commercial property owners.

"Overall, market conditions are improving from the carrier's perspective when comparing renewal benchmarks such as rate increases, reduced capacity, restricted underwriting appetite and downward pressure on commission," Edack says.

With today's primary renewals coming in at a higher rate, this only transcends to a two-fold problem. Increased primary rates and umbrellas with rate increases of 20% to 30% are being charged on a $12,000 renewal instead of last year's $10,000. Many agents have delivered very few rate increases since 1985, if indeed they were even in the business at that time.

"From an E&S perspective the market conditions are finally into alignment with the role that the specialty carriers are scripted to play," according to Edack. "Historically, the non-admitted and more recently the admitted specialty carriers have acted as a relief valve due to market pressure that is created as the standard carriers elect to exit broad classes of business while restricting coverage and capacity. During this period of market adjustment the activity of business flowing through the wholesale distribution channel directly relates to the risk appetite shifts of the standard carriers. While these changes create additional opportunities for the specialty carriers and whole brokers, the firming market has also exposed a significant generation gap in both the underwriting and brokering communities. The gap in experience could further complicate the marketing process, as both will experience price increase for the first time. Once again, personal rapport, business contacts and professional submissions are playing a more important role in marketing business."

At the 75th annual meeting of the American Association of Managing General Agents (AAMGA), Len LoVullo, immediate past president, was asked what are two things would assist agents in working with MGAs. "Don't send the submission to every market; we talk to each other and have some of the same carriers." LoVullo also recommended that agents try to select a few MGAs and work with them to develop a business relationship.