'Paying More for Less' Sums Up Umbrella Renewals 
The mid-year umbrella liability renewal marketplace is "dysfunctional" if you are a risk manager and a "bumpy ride" if you are a broker. Rates are up at least 10-30 percent, capacity is a problem for certain industries, and mold exclusions are becoming more common, brokers and risk managers agree.
"Put your seatbelt on" is what Cynthia Shafer, president of Itasca, Ill.-based International Special Risk Services, a division of Risk Placement Services Inc., Arthur J. Gallagher & Co.'s wholesale arm, tells her umbrella and excess clients, many of which can expect a "bumpy ride" as their expiration dates approach.
"Most insurers and reinsurers are still correcting their casualty book, and this has resulted in double-digit increases for the mid-year renewals," said Ms. Shafer. "For a great risk, you might see premiums 10 to 15 percent higher; 25 to 30 percent is the average increase."
But it can get much worse, Ms. Shafer is quick to point out, for any risk with "hair" on it. "If you have had losses, or are a contractor or day-care center, or have a large vehicle fleet, you are likely to see increases well in excess of 30 percent," she noted.
"Further complicating this renewal cycle is that the reinsurance treaties for some major umbrella carriers renew on July 1. The terms presented to clients will be contingent upon what these carriers can negotiate in their own treaty renewals," Ms. Shafer said.
"Some insureds that can no longer afford to carry a $10 million limit are cutting back to $5 million, sometimes for a premium that is more than they were paying for [the $10 million limit]," Ms. Shafer explained. "There are clients that choose to reduce their limits and wait for the market to turn. At that time, we will be asked to retroactively plug holes and purchase additional limits."
Not only are prices higher and limits lowerunderwriting also is tighter and exclusions are being added.
"Underwriters are declining business based on class, even if the individual risk is clean," lamented Ms. Shafer. "They are also requiring a $2 million underlying limit for automobile liability, like they did back in 1985 and 1986. And no one wants to insure the 15-passenger vans [because of possible roll-over potential] without details of safety procedures in force."
Ms. Shafer also reports seeing mold exclusions being inserted into umbrella policies.
"Quotes [in the renewal market] are coming down to the last minute and no one is giving any reductions–carriers are generally looking for 15 to 20 percent increases," according to Fred Curatolo of Stewart Smith East Inc., Willis Group Holding's New York-based wholesale division.
"In trucking, there are only limited markets for the lead umbrella–carriers want to write only excess of $5 million. And not many carriers are insuring residential construction in New York; you might need five carriers to get $25 million in limits," he said.
For most other types of risks, Mr. Curatolo said "the capacity is there, it's just looking for the right rate." He also noted that "information is king" and prospects that provide the most complete submission get his attention.
According to Tom Grommell, senior vice president of casualty syndication for Aon Risk Services Inc. in New York, "umbrella pricing is trending upward, but at a slower rate" than last year.
"Average increases are 20 to 30 percent, but it could be 100 percent for clients with significant loss activity or in a tough industry such as pharmaceuticals," he added.
Mr. Grommell pointed out that clients coming off of multi-year deals at highly competitive pricing are also experiencing substantial premium increases.
Some clients are taking higher retentions to save money or because it's required by the carriers, Mr. Grommel indicated. He noted that attachment points are rising, especially for trucking policies, which now generally attach at $5 million, where $2 million used to be common.
While acknowledging that there is a capacity shortage for some risks, Mr. Grommell said this has been "partially ameliorated by new [Bermuda-based] entrants into the market such as Arch, Endurance and Allied World."
Mr. Grommell noted that Bermuda-based Allied World Assurance Company, whose investors include AIG, Chubb and Goldman Sachs, has brought $50 million in capacity to the market and participates in the second excess layer or above.
As for policy language, Mr. Grommell noted that umbrella and excess carriers are often using their own forms and inserting more restrictions and exclusions, and are not necessarily following the terms and conditions of the primary.
"It has become especially difficult to obtain professional liability coverage as part of the excess program," he added.
Wayne Salen, director of risk management for Palm Beach Gardens, Fla.-based HQM Inc., an operator of long term care and assisted-living facilities, knows about volatile renewal premiums. His industry has seen umbrella price increases that sometimes approach 400 percent.
There are two aspects to the current umbrella market, said Mr. Salen, who is also on the board of directors of the New York-based Risk and Insurance Management Society. "For the distressed industries, it's really nasty–pricing in the nursing home industry is through the roof. In other industries, costs are up, but it's still reasonably affordable," he said.
"Insurers can't get beyond class underwriting; they are writing lower limits and putting on heavy restrictions per location," added Mr. Salen.
HQM's solution to the current state of the market is to start an offshore captive insurance company, to be domiciled in the Cayman Islands. Mr. Salen noted that Cayman was chosen because many health care-related captives are located there and the infrastructure exists to service this type of business.
Gaylord Entertainment Co., which owns and operates hospitality and entertainment properties including the Grand Ole Opry, has also experienced its share of umbrella heartache. Randy Thurman, director of risk management of the Nashville, Tenn.-based company, had a 30 percent increase in his umbrella and excess program.
"There has also been a diminution in the limits underwriters are willing to write," noted Mr. Thurman. He blames lack of acceptable reinsurance as contributing to the current bleak market conditions for umbrella coverage.
On the lone bright side, Mr. Thurman characterized policy wording as "no more restrictive" than expiring, with the exception of mold exclusions appearing in some policies.
"The state of the umbrella market varies by industry," said Chuck Robinson, senior vice president and marketing manager of Sheppard Riley Coughlan, the Boston-based broker. Sheppard Riley Coughlan is a unit of Hilb, Rogal and Hamilton.
"Construction and transportation have capacity problems now, fewer carriers are writing these industries and those that are usually want higher attachment points," he said.
He generally has seen renewal premium increases in the 25 to 50 percent range.
Most carriers are requiring a $2 million underlying limit for automobile liability, Mr. Robinson said. He also noted that some insurers are starting to write umbrellas on non-admitted paper so that they will have more flexibility as to forms and other terms.
In addition to seeing mold exclusions, Mr. Robinson predicted that SARS exclusions may be on the way.
R. Bryan Tilden, principal of Pittsboro, N.C.-based consulting firm Tilden & Associates, sees three drivers of the current high-priced umbrella market: "First is reinsurance: the reinsurers are being very careful about pricing. Then there is the stock market: investment income dried up, so insurers now have to make underwriting profits. There is also the influence of the rating organizations: the carriers want to remain financially strong to maintain their ratings."
Capacity is also an issue, according to Mr. Tilden. "In some industries, companies are happy to get a $10 million limit, where they used to carry $50 to $100 million. Insurers are also requiring higher attachment points."
Mr. Tilden provided a fitting summation for the current firm pricing environment: "Umbrella insurers realized that you can't make an underwriting profit charging $200 or less per million dollars of limit. They also started really caring about what the rating organizations like Bests think of them. They don't want to become another Kemper."
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.
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