Getting the Umbrella and Excess Layers Right in a Hard Casualty Insurance Market

If you've been involved in any conversations about business insurance, you're probably aware that the theme of the year is a hardening market. Driving this trend on the casualty side is an explosion of large liability claims coupled with reductions in excess liability capacity. The impact of the hardened market is increased premiums and restricted coverage for policyholders.

Risk managers and insurance buyers still have options, even in this challenging market. By approaching the placement of the umbrella/excess tower as a strategic endeavor, businesses can minimize pricing surprises and ensure broad coverage and sufficient limits while mitigating price increases.

What's Driving the Hard Casualty Insurance Market and How to Prepare

The much-discussed trends of social inflation and litigation funding have come together to drive up average liability claims costs and create the perfect storm for casualty insurance.

Because umbrella insurance policies are the first major block of coverage available in the excess tower, they are most exposed to large claims. As a result, insurers are severely reducing umbrella limits (cutting limits from $25 million down to $5 million in some cases) while also requiring higher umbrella attachments (the total of underlying limits at which the umbrella attaches). Additionally, excess casualty insurers, who provide limits above the umbrella layer, have become much more disciplined in risk selection and pricing.

By rethinking the construction of casualty towers, businesses and their brokers can still execute successful excess casualty renewals in the newly-challenging market. Utilizing new placement strategies are critical in order to:

• Minimize surprises in the renewal process
• Validate viable program structures and technical pricing (which can drive underwriters to offer optimal pricing based on the company's specific losses, exposures, and market conditions)
• Review multiple program structure options in order to create competition among insurers and provide flexibility on coverage terms

Let's look closer at some specific strategies for optimal coverage and pricing.

Avoid Budgeting Surprises

It's important to have a good idea of what is likely to happen to the insurance program structure and pricing well in advance of the final renewal negotiations. In this market, the status quo simply will not cut it.

We use technical pricing simulations based on actuarial analysis and underwriting tools to stress test the expiring program and forecast pricing in the current market for different program options.

For example, if you had a large umbrella layer in the current program it would be important to know the pricing impact if the market required a split of the umbrella into two layers.

Say you already have a $25 million umbrella but for all the reasons outlined earlier, the insurer is unwilling to put the full $25 million at risk in a single layer of coverage. Clients and brokers will likely need to split that $25 million umbrella into a $10 million umbrella with $15 million in the first excess layer. When umbrella limits are reduced and new layers of insurance are put in place, cost inevitably rises as insurer overhead costs are duplicated and each insurer seeks an adequate price for their capacity. Budgeting for this increase is critical, as is conducting a focused competition among best-suited insurers for both layers.

Also keep in mind that minimum premiums for most risks are rising. It used to be common that you could obtain high excess capacity coverage for $1,000 per million in limits. All that is changing. Now, minimum premiums are rising to $2,000 up to $5,000 per million in limits. Of course this all depends on the client's specific industry and risks.

In every case, the pre-renewal budgeting process should take into account the current market dynamics.

Approach Umbrellas Strategically

Relationships matter here. Unless your incumbent insurer is exiting the market for your risk, you will likely find that your current insurer is highly incentivized to retain the relationship even if they need to increase the price for the coverage. This option will often be more favorable versus going out to replace the coverage by some other insurer. Cultivating a strong partnership and mutual understanding with incumbent insurers has never been more important.

Still, it's important to engage your incumbent insurer well in advance of the renewal so that you know what questions and issues may arise. That way you can provide the precise safety, claims management and quality control information needed to get the insurer comfortable with the risk.

As you are leveraging your current relationship with the insurer, you want to cultivate other options as a hedge to the fast-changing market conditions. Alternative insurers competing for the umbrella can also compete for higher excess layers, for which there will almost certainly be dislocation.

Keep Global Options Open

In the past, it was relatively easy for many US corporations to place their entire casualty insurance program in the admitted US insurance market. As insurers have cut available limits, it is important to expand the hunt for capacity to the Excess and Surplus market in the US, as well as to global markets.

Historically, the Lloyd's of London market was a big player for the toughest US liability risks. But for many standard risks, London prices were consistently higher than those from US insurers. However, with the rising costs of the current US market, the London market is newly viable for a much broader group of policyholders, especially those needing small layers to fill gaps in an excess tower. Bermuda has similarly become more competitive relative to the US, although minimum prices per million of coverage remain high and restrictive coverage terms are more common in that market.

Consider Coverage Trade-offs to Manage Costs

In the soft market, many companies took advantage of cheap excess liability capacity to gradually increase their liability towers year after year. Rising pricing, even for "commodity" high-excess layers, is forcing businesses and their brokers to think more carefully about appropriate limits.

Here are three variables in determining the appropriate limits:

1. Your business's unique risk profile, including exposures, loss history and tolerance for risk
2. What your peers are buying in limits
3. The catastrophic loss activity in your industry and adjacent industries

To help manage costs, consider accepting restrictions on policy wording for exposures for which you are confident in your risk management controls. Among coverage terms and exposures for which their is an extremely limited market and pricing is consistently high are:

• Communicable disease such as COVID-19 coverage
• Abuse or molestation
• Wildfire liability

Brokers and insurance buyers should always work diligently to source insurance with the broadest possible coverage terms but in the hardened market trade-offs have become more important to consider.

With insurers cutting available capacity and an increased frequency of catastrophic losses driving insurers to increase prices, there is no question that today's excess casualty market is the most challenging in decades. Policyholders and their brokers can still build cost-effective liability towers with broad policy wording, but analytically-driven and creative placement approach is critical.