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Knowledge Center Items Scarcity and Sky-High Costs: An Umbrella and Excess Market Update

Scarcity and Sky-High Costs: An Umbrella and Excess Market Update

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The excess marketplace this year reminds me a little of the toilet paper shelves across the country in March. For as long as anyone can remember you could go to any grocery store, convenience store, CVS, or Target and the toilet paper aisle would have a dozen or so different brands, from premium high cost to low budget options. You could get a single roll or a three pack, a dozen, or even 24 rolls in a pack.

All of a sudden COVID hits and you can’t find a single roll of toilet paper anywhere. You go to four different stores with no luck, try for a few more days and finally find a single roll of single-ply TP and the cost is $15. You gasp at the price but purchase the roll anyway.

Excess Liability: A Scarce Resource

The excess marketplace has acted in a very similar manner this year. Excess liability has always been a cheap commodity with an abundance of capacity. 18 months ago, getting a carrier to give $25M of capital for $25,000 was a normalcy and there was never an issue getting a lead placed or filling out the entire amount of capacity a buyer wanted to purchase.

Enter 2020, and all of a sudden excess liability is a scarce resource, and when you do find an option the pricing is much higher than expected, the terms are more restrictive and the capacity isn’t as much as the buyer wants.

Skyrocketing Costs & Lower Limits

As we hit the halfway point of the 3rd quarter, we continue to see an evolution within the excess liability market—and not for the better. While we have been seeing rate and premium increases throughout the year, all of a sudden the increases seem to have ballooned to a point that getting a renewal less than 2x expiring is more and more challenging.

There are low-hazard, low-exposure accounts that fall outside of what I’m referring to, but on medium- to high-hazard accounts we are seeing rates and premiums just about double; on really high-hazard accounts, they are going up over 3x in some instances. 

That said, incumbent pricing does play into the overall percentage increase. In a lot of instances, the incumbent carrier had been 20%+ below the rest of the market. If this was the case and the incumbent non-renews, and the market rate is 40% higher than it was last year, your insured is going to get hit with a much bigger increase than you may expect or what the market average is.

Earlier in the year I talked about rate increases as carriers started reducing the limits they would offer, and then increases kept getting larger as there was strain in the supply chain. Underwriters were being asked to handle double to triple the workload they were handing previously, due to the limit reductions and increased number of carriers one needed to fill out an excess tower.

Deployable Capacity vs. Available Capacity

I think as an industry we’ve moved past those two items, as the limit reductions started mid-2019 and aren’t as frequent as they had been (although often still there), and carriers seem to have figured out how to handle the increased workload to a degree. Now we’ve hit an interesting point where deployable capacity is less than available capacity, again on medium- to high-hazard exposure.

As premium writings have increased, while limit exposure has decreased, carriers have become very selective in what accounts they are willing to quote and usually expect a premium just to put out capacity. This isn’t necessarily the case with incumbents, but the premium increases at the bottom of the tower push everyone’s pricing up as carriers work to maintain relativities—which are changing due to the lower capacity. 

For instance, two years ago we may have had a lead $25M priced at $200,000 and then the $25M xs $25M at 22.5% of that or $45,000. Now the lead $5M probably goes for $200,000, the $5M xs $5M for around 50% of that, and then maybe a $15M xs $10M for 40% to 50% of the $5M xs $5M. If you can get a carrier to put up $25M xs $25M over this, the relativity may stay consistent, but if you are working with layers of $15M and $10M the relativities are going to be higher and further increase the cost.

Limited Leads

The last item I’ll touch on which I think will continue to drive the excess market pricing up is carriers lack of willingness to either write a lead or put up meaningful capacity in a lead layer. There are a handful of markets that are now looking to limit their leads to just $2M or $3M, and only a handful of other markets willing to offer a lead period. Again, these comments are directed toward the medium- to high-hazard exposures as this is the market segment that is seeing the most pain.

Expect the Unexpected

We have seen significant changes in the excess marketplace over the past 18 months, and we think it will continue through at least the next 18 months. We have had to deal with significant inconsistency and unpredictability which has made managing buyer expectations very challenging.

I mentioned the importance of communication early and often in a previous update, and it is still vital to communicate that clients should expect the unexpected because that we is what we are routinely dealing with. Most of my conversations these days start with something along the lines of “if we get the entire excess tower quoted at less than double the expiring premium and prior to the expiration date, we are in a good situation—now let’s discuss our strategy to ensure we secure the best available program and have it to you before the current program expires.”

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