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Knowledge Center Items An Umbrella and Excess Market Update

Consistent Unpredictability: An Umbrella and Excess Market Update

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As Q4 of 2020 wrapped up, it’s safe to say that every casualty broker was hoping for market stability in 2021. After a year of navigating the most challenging and erratic casualty market in 30 years, everyone was burned out come December.

While we do think the excess casualty marketplace won’t be as challenging in 2021, it will still be a year defined by consistent unpredictability. The biggest challenge in the excess marketplace in 2020 was brought on by the capacity reductions and non-renewals from insurance carriers. Yes, there was a lot more underwriting going on, but the changing guidelines and philosophies that lead to non-renewals and capacity reductions were the biggest issue. Industry leaders anticipate that 2021 is going to be a different challenge, including dealing with a changing underwriting philosophy. 

In 2020 carriers pushed rate harder than anyone thought possible, as it was clearly a seller’s market with buyers having limited options.  There are still going to be rate increases in 2021, driven mostly by reinsurance renewals which, on average, double last year’s increases. However, we don’t expect the increases to be consistent or as punitive on well-performing or low-to-medium hazard accounts as they were last year.

The challenge in 2021 will be navigating changing underwriting philosophies whether it be increasing pricing relativities, concerns around Stowers Doctrine, concerns around Risk Purchasing Groups, or concerns around certain coverages and emerging areas of loss such as abuse, assault, liquor, cyber, and wildfire. Knowledge of loss-leading exposures and fear of the unknown will continue to drive underwriting decisions in the casualty market and limit available capacity.

Why Relativities Are Increasing

At the end of 2020 we started to see carriers’ excess pricing relativities increase, making it difficult to estimate or predict pricing. Whereas in 2019 it was possible to get a $5M xs $5M excess layer for 25% of the lead $5M, by the end of 2020 that same layer was averaging 60% or so of the lead $5M. 

The thought behind the relativity increase is that if there is a loss over $1M, the probability of it being a $10M+ loss isn’t much less than the probability of it only being a $5M or $6M loss, and because of this, carriers started charging for it. This has a ripple effect up the tower and now the carrier attaching at $10M is not only pricing off a higher starting point, but increasing their relativity as well. If there is a large loss, the probability of it being over $10M isn’t that much less than it being less than $10M. 

The influx of nuclear verdicts and third party litigation in recent years have played a large part in the relativity increases, as excess liability carriers are not as much pricing off of an insured’s individual risk profile, but rather the potential for catastrophic loss within the exposure class. While we know relativities are increasing, they aren’t increasing consistently across hazard levels and the relativity bandwidths are seemingly greater than they had been in the past. 

Stowers Doctrine and the Risks of Going to Trial

Stowers Doctrine is another issue that has been coming up more and more frequently.  It was put in place to protect insureds from abusive practices, and imposes an extra contractual duty on an insurer to act in good faith when deciding whether to reject a pre-trial settlement that is within the policy limits.

If an insurer rejects a pre-trial settlement within the policy limits and takes the claim to trial, and the verdict comes back not only against the insured but greater than the policy limits, the insurer could be held liable above and beyond the stated limits in their policy. Because of Stowers Doctrine, several insurance carriers now stay away from accounts in FL, CA, or TX or are wary of being at the top of an excess tower on an account with exposure in one of these states. 

Risk Purchasing Groups Pose Challenge After Challenge

Risk Purchasing Groups (RPGs) have been incredibly popular.  An RPG is a mechanism for unrelated insureds to aggregate their exposure and buy collectively from a single source and on a single policy, typically at well below market rates. RPGs started creating challenges in 2020 as several of the largest had changes in their guidelines which forced non-renewals and buyers to now secure coverage through the open market. 

2021’s challenge is going to be securing excess coverage on a tower led by an RPG due to the recent instability, perceived lack of underwriting on some, and avoidance of putting up too much capacity on a single account, given that many carriers have separate divisions that put up capacity for RPGs.

Restrictive Terms & Conditions Are the New Normal

The last item I’ll touch on at the moment, but by no means the last of the challenges we’ll face in 2021, are restrictive terms and conditions that two years ago would have been unacceptable but now have become commonplace.

Abuse and Molestation has become a big concern on any account that has exposure to children and many carriers that can offer the exposure will only do so on a claims-made basis.  This becomes problematic when going over a Philadelphia program that provides affirmative abuse coverage on an occurrence form. 

Additionally, we’re seeing carriers change their coverage triggers on Abuse and Molestation from “Per Victim” to “Per Perpetrator,” which further narrows the scope of coverage and availability of limits, especially on cases we’ve seen recently where there are multiple victims of the same perpetrator. 

Assault & Battery is becoming a bigger issue on habitational accounts and some hospitality accounts.  Law enforcement coverage is an extremely hot topic on public entity accounts, and due to the civil unrest in the summer, one carrier actually retracted all their quotes to reissue with an increased retention on the law enforcement coverage two weeks prior to July 1st renewals.

Other coverages that are going to continue to be challenging are wildfire, opioids, liquor, and auto.  Communicable disease exclusions are probably here to stay and as the year goes on, other exclusions and restrictions are more likely to be introduced.

Complete Submissions Are Key in a Challenging Market

To wrap up, 2021 is going to be another challenging year for the reasons previously mentioned and several others that will emerge as the year progresses. The best thing we can do as agents and brokers is start the renewal process as early as possible and with the most accurate and detailed information. 

Having 7–10 years of currently valued loss runs, completed supplementals, updated exposure schedules, safety manuals, liquor protocols, fleet maintenance manuals, or any other document that can help show why an underwriter should take a risk on the insured goes a long way and ultimately will get your submission to the forefront of the underwriter’s attention. A complete submission is paramount to achieving optimal results in such a challenging market, and providing underwriters with everything they should need initially to get started allows them to expedite the referral process to their manager and so on up the chain of command, should the risk warrant that type of attention and sign-off.  

We think the excess market will continue to be slow in turnaround time, though not as bad as 2020 since we don’t expect nearly as much displacement of capacity on accounts due to the changes carriers made in 2020. Communicate with your insureds early and often, set the expectation for the unexpected, and let them know what we are doing as a brokerage community to ensure we deliver the best renewal program available despite how painful it may be.

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