Hard Umbrella Market Nowhere In Sight

While the umbrella liability and excess casualty markets are attracting new players, along with past participants who swore off the segment years ago, most experts don't foresee the hard market pricing lure that typically brings new capital flooding into a market niche.

Even though rates aren't jumping, there are usually big premiums associated with umbrella policies, explained Paul Smith, regional placement officer for Willis HRH in New York.

Mr. Smith and Dan Aronson, a wholesale broker with Mercator Risk Services, both said the appetites of new entrants are somewhat dictated by limitations set by their reinsurers and capital providers.

The first question reinsurers ask new entrants is, "Are you going to write lead umbrellas?"--because if the answer is yes, they won't provide reinsurance. "It's a tougher place to sit" from a claims standpoint, Mr. Aronson explained.

He said new players are generally focused on excess layers above $25 million or $50 million. A few, he reported, put up larger amounts of capacity, but at higher attachments. "It's a much safer place to be."

The brokers confirmed that buyers seeking to diversify programs are pulling large blocks of capacity away from any single insurer, but replacements are typically made in the higher layers. They specifically said American International Group retains its dominant position in the lead market in spite of this activity.

Insureds recognize that AIG has the broadest appetite, the experience to handle tough claims and crisis management service, according to Mr. Aronson. "They wrote the reforms that other [insurers] are now trying to put forth as part of their own offerings. They still set the bar," he said.

Mr. Smith said "a very inappropriate assumption...is that the legacy AIG organization is giving everything away in order to maintain its dominant position. I can assure you that is not the case."

On the other hand, "if you were to extract some of the new[est] entrants from the marketplace and allow only traditional capacity..., the current rating environment would be different," he said, including the "Class of 2001" Bermuda insurers (Allied World, Endurance, AXIS and Arch) in the traditional bucket.

While the newest entrants "aren't picking up the binders" on all accounts being shopped, he said they are setting "very aggressive premiums," and in some cases "legacy insurers are coming down to that level" in attempts to hold business.

In addition to true new capacity coming from new insurers, Mr. Smith said existing Bermuda markets are expanding their appetites to lower layers and some European companies are back in the excess lineup.

For example, he said Allianz, which exited the U.S. market after poor experience in 1999 and 2000, is moving methodically back into the market for difficult exposures and lead umbrellas.

Leslie Nylund, chief placement officer and national partner for Willis HRH, reported that Munich Re, another former participant, is now looking at large, complex casualty placements for Fortune 500 clients, with minimum attachments of $100 million.

Representatives of existing U.S. insurers, like Denise Morris, senior vice president at Liberty International Underwriters in Boston, and Michael Vought, managing director of Markel in Red Bank, N.J., emphasized their firms' consistency in the excess and umbrella markets and their broad appetites as competitive strengths.

"If there's a class we don't typically see, we try to research it and find a way to write it," said Mr. Vought, referring to unusual risks within the small-to-midsize, moderate-to-high hazard surplus lines categories Markel consistently writes with limits typically from $3-to-$5 million.

LIU, offering $50 million in capacity, has been in the umbrella market for risks ranging from sporting goods equipment makers to Mom & Pop stores and Fortune 500 firms for 10 years. A solid bench of underwriters on staff has been through many market changes, Ms. Morris noted.

She said the current market is "as soft as those of us who have been working in the excess casualty market can remember," and Mr. Vought said rates for the industry are starting to approach inadequate levels, like back in 1999 and 2000.

"When economic conditions are poor, that's going to increase frequency and severity of claims," he said, predicting the industry might not see the results of these conditions for another two years.

Garick Zillgitt, vice president of casualty commercial lines for Fireman's Fund in Novato, Calif., said "we are seeing severity move back up in our book," going on to express concerns about the impact of the economy on insureds' risk management processes. He also said the recession could spur more people to sue one another.

He characterized the current market as "a bit of a slugfest," but said it's not as bad as in 1999. For Fireman's Fund, which writes standard lines umbrella, admitted excess over other insurers, and nonadmitted excess on tough accounts like premises liability for water parks, pricing is flat, he reported.

"Right now, we're seeing stability with respect to rate change," Ms. Morris agreed. "A year ago, we were looking at a market that was declining 10- or 12 percent."

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