The Comeback Kid: Buffer Liability

This need for a buffer layer of coverage that is creeping into the structure of risk-sharing within the excess and umbrella insurance world is one of several signs that the market is in the process of turning from soft to hard.

 "The excess and surplus market has always stepped in to provide relief in transitioning markets," says Edack.

"We've seen in prior cycles that this need for buffers is a precursor to a hard market," adds Drinkwater.

Buffer liability exists between the primary and excess layers of insurance. But it has been largely unutilized as a coverage tool for the past two decades.

Why? Since the appetite for risk has been so great, the primary and excess layers have butted up against each other. The limits of one and the attachment poi

nt of another have worked well for years.

Typically, the limits on a primary layer are $1 million. In recent years, the excess layer would attach there.

However, risk appetites on both sides of that $1 million mark are contracting.

Because the excess layer has lately been penetrated more often by losses (especially in select high-hazard classes), it is pushing up the attachment point at which excess carriers are comfortable.

The excess/umbrella market is just "not putting out the same capacity now," says Mario Vitale, president of Aspen U.S. Insurance. The market is "rapidly pulling to higher attachments—greater than ever."

Meanwhile, results in the primary market haven't exactly been stellar, either, and primary insurers that had dipped into the excess space, taking on more risk, are pulling back after feeling some hurt with losses.

"Primary [carriers] are re-underwriting their books," says Vitale. "You see them doing that now. The business is being pushed back into excess."

This mutual retreat by both primary and excess carriers creates a coverage gap—and a new market for players willing to step in to bridge it.

"It's an opportunity developing for excess carriers to provide this buffer layer," says Drinkwater.

INCREASINGLY COMMON CONVERSATION

So just how much buffer business is being done?

While the trend is still in its early stages, conversations about buffer liability have definitely become more common of late, Drinkwater says.

Edack concurs, pointing out that he's seen a lot of interest "very recently" and has provided quotes for a number of deals.

John G. Pagoumian, president of wholesale-broker Napco, says he just had a conversation with a retailer about what he calls the "changing signs out there in the market. It's a topic of discussion. There's a higher demand as underlying limits change, and prices are going up."

John Willsey, a senior broker at AmWINS, says several classes—notably large, difficult risks—are increasingly in need of a buffer layer.

New York's construction marketplace, for example, is "rapidly constricting," he says, due to recent losses from crane accidents and from labor laws, which change workers' compensation as the sole remedy for claims.

"It's very difficult to get placements," says Willsey. "Losses have been piercing the umbrella. [Excess carriers] want higher attachment points."

Habitational coverage is also seeing firming, he notes, pointing to the possible emergence of the need for a buffer layer in this line.

Large auto fleets of more than 500, para-transit, truckers and some classes of emergency vehicles also fit into the high-risk category, lending themselves to a change in the risk dynamic, says Edack.

Edack adds that on the West Coast, contractors and commercial and residential wraps are emerging as classes needing buffer liability.