Knowledge Center Items Q3 Umbrella and Excess Update: New Capacity, Challenges and Creative Solutions

Q3 Umbrella and Excess Update: New Capacity, Challenges and Creative Solutions

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As we move into the final quarter of the year, the overall state of the Umbrella & Excess market hasn’t changed much over the last 3 months. However, the aggressiveness we mentioned in July coming from the standard markets is continuing and seems to be expanding. 

In this update we will briefly provide a market update and address the impact of the new capacity that has entered the excess world, provide thoughts on current pricing from the reinsurance perspective, and conclude with an interesting new product one of our partner markets is introducing.

Market Update: Hazard Levels Make All the Difference

The results in the third quarter continued to be unpredictable, but much of what we saw was in the insured’s favor. Standard markets continued to be aggressive both in pricing and capacity. We witnessed a carrier offer a $30M excess of $10M layer, which is the most capacity we’ve seen a standard domestic carrier offer in probably two years and in several instances, pricing relativities came down from standard markets. We must point out, though, that this was on low- to medium-hazard accounts and not readily seen on the tougher classes of business.

In instances where carriers non-renewed or reduced capacity, pricing was increasing 50% - 100%+ proving incumbent carrier pricing typically to be below the rest of the marketplace. Incumbent carriers have an advantage on medium- to high-hazard accounts, while they may be at a disadvantage on low- to medium-hazard accounts due to the broad book rate increase targets all carriers currently have on renewals.

New Capacity Abounds

The high rates and restrictive terms environment has attracted much capital to the insurance sector, with over 15 new market entrants on the casualty side in the past year. This has led to a game of musical chairs in the carrier world, which we expect to start to impact underwriting guidelines of existing carriers as new leadership comes in, possibly with different philosophies and approach to risk. 

Most of the new excess capacity is focused on trucking, construction, and energy businesses which has helped keep pricing down in these sectors. Outside of these classes the new capacity has helped fill vacated capacity, albeit at significant increases, or offered additional limits as some insureds have looked to increase theirs purchased in 2021.

Reinsurance: More Capacity, But Higher Rates and Restrictive Terms

Now that we have provided some color on our current situation, let’s look at the “why” behind the current conditions. It is no secret that loss costs have been increasing since 2014 with third party litigation, more sophisticated plaintiff’s bars taking methodical approaches and willing to take cases to trial versus settling, and increased medical costs all having a significant impact. 

A slip and fall claim in 2016 cost an average of $20,000, where today that same claim costs $60,000. These increased loss costs drove the rate increases we’ve seen and even though rates are at the highest levels they’ve been, reinsurers are still expecting calendar year results to be challenged due to older years’ loss development. 

However, on an accident year basis loss ratios should improve dramatically. This will most likely lead to a tapering of rate increases but probably not a significant reduction in pricing as today’s rates are probably fairly close to what the new baseline will be. One factor that has not yet entered most carrier pricing models is the economic inflation we have started to see over the past year or so. This could have an impact on 2022 and 2023 pricing, as could an influx of claims and nuclear verdicts as the court system continues to open and cases taken to trial.

Overall the reinsurance market is not a firm market as there is an abundance of capacity willing to be deployed. The capacity is simply requiring higher rates and more restrictive terms than in the past.  There are very few, if any, carriers acting irresponsibly at the moment or “buying” business or trying to undercut the market. Given the current rates and the difference in loss history from a standard market to an E&S market, we would expect standard markets to continue to be competitive, as they view the current rates as favorable while the E&S market will probably remain more conservative since many carriers do not see the rates being at the appropriate level.

Creative Solutions to Combat Challenges

Throughout the past two years we’ve tried to offer several creative solutions to combat market pricing and capacity. We’ve put together programs on a retained limits form, quota sharing a layer with a carrier, offering a corridor retention, and several other solutions. Most did not pan out as insureds tended to put a higher price tag on the risk they would be retaining than the pricing offered by the carrier to take the same risk. 

One of our partners came up with an alternate product which is a multi-year and cancellable policy that sits above an insured’s retention and below the umbrella which enable companies to share in the risk and pay a premium commensurate to their actual loss experience. The product is highly customizable with limits available up to $10M, up to a three year policy term, option to have a term aggregate or annual aggregate reinstatement, paying premiums upfront with return premiums available or reduced upfront costs with premiums being due on an installment basis and tied to loss experience.

Wrapping Up

Looking into the end of 2021 and into 2022, expect premiums for certain classes of loss-heavy business such as education, habitational, non-profit, or municipalities to continue to increase given the large settlements surrounding sexual abuse & molestation, assault & battery, and law enforcement liability issues.

Premiums on lower hazard classes of business could be flat- to single-digit price changes in 2022.  Speaking in generalizations, however, our market research would indicate there is ample capacity on the reinsurance side that will trickle down to the direct carriers who should continue to push for growth and new business. While the firm market is not coming to an abrupt halt by any means, the influx of capital coming in may help facilitate a plateau of premium for the end of 2021 and well into 2022.

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