The first quarter of 2019 saw the excess and umbrella markets start to move toward tighter underwriting, and each quarter since has seen the market get firmer. The second half of the year brought greater capacity restrictions, higher prices, and significant challenges around program structure, due in large part to nuclear jury awards that have hit excess and umbrella lines like never before. Brokers that succeed in 2020’s changing market will depend on creativity, proactive strategic planning, and strong carrier relationships to help clients weather the storm.
While property lines were the first to be hit with limit cutbacks after two years of significant wildfire and hurricane activity, policyholders are now facing higher rates and reduced limits in a changing excess and umbrella market (source). All across the country, a renewed focus on underwriting profitability is creating significant challenges around program structure as limits drop and rates rise (source).
Several factors have come together to produce the market changes now facing the excess and umbrella markets. Over the last decade, excess and umbrella coverages were consistently underpriced even as healthcare costs rose and societal issues such as opioid addiction, gun litigation, increased hurricane activity, and wildfires became more prevalent (source). In addition, constant improvements in technology and science have enabled the development of tools widely used to detect losses and evaluate their causes. Consumers’ technology has also granted greater access to business information such as trucking fleet CAB reports or corporate safety records. Through the power of social media and a constant stream of online news, such information is often used to build anti-corporate sentiment and drive up jury awards (source).
LARGE JURY AWARDS DRIVING UP COSTS FROM COAST TO COAST
While many factors are playing a role, those with an eye on the market point to higher-value jury awards as the primary driver of the hardening market (source). It’s no longer unusual for a jury award to reach more than $10 million - or even billions - as jurors often double the requested award amount.8 In early 2019, a jury in California awarded more than $2 billion to a couple alleging that Roundup weed killer caused their non-Hodgkin’s lymphoma (source). Judgments that may have been worth $100,000 a few years ago, are worth $300,000 in today’s litigious environment, and it isn’t uncommon for an attorney to immediately demand payment up to the policy limit (source). This means that underwriters are carefully evaluating areas that are notorious for large jury awards or are considered hostile operational environments because they can drive up rates nationwide (source). For example, over the last 12 - 18 months Georgia has become a place where the claims environment has shifted regarding judgements, and that trend is making its way into other southern states such as Texas and Florida, where placing defense outside limits is becoming more of a challenge.
Today's juries generally perceive big corporations to be unethical – willing to do anything to increase their bottom line. Stories of corporate malfeasance, true or not, often spread across the internet like wildfire, creating an atmosphere of mistrust that works in favor of plaintiffs because all large organizations are viewed as overly privileged entities with deep pockets (source). As stories of the individual versus big corporations have become more accessible, juries’ tendencies to side with those they view as “the little guy” have grown, and any error made by the defendant becomes enough proof for a jury to side with the plaintiff even if the defendant did everything right (source). In 2018, Werner Enterprises, Inc., one of the country’s largest trucking companies, was shocked by massive jury award for a 2014 fatal car accident in Texas. According to Werner, the commercial vehicle could not avoid the collision when a pickup crossed over into oncoming traffic. Werner’s truck was operating below the speed limit and did not lose control. In addition, authorities did not find the Werner driver at fault for the accident (source). However, the plaintiff's attorney argued that Werner’s truck should have pulled off the road completely due to inclement weather, and the jury agreed - to the tune of $89 million dollars.
The cost of colossal jury awards, like Werner’s, are hitting excess and umbrella lines like never before. Combined with other market factors, the result is considerably higher premium rates in 2020. In 2018, most policyholders saw single digit rate increases, but 2019 mid-year data reflected premium increases ranging between 5% and 20% in the excess and umbrella spaces, with 9.8% being the average as insurers strive to improve profits through more careful underwriting (source 1, source 2). Challenging classes are seeing prices rise at least 20%, with some seeing triple-digit price hikes as big losses cause rates to skyrocket. Habitational classes seeking general liability insurance are being hit hard as risk purchasing groups (RPGs) fall away, and the commercial auto and property sectors are seeing large premium increases as market-leading carriers adjust policy limits downward (source). Even after multiple years of premium increases, commercial auto rates increased 9.1% in the third quarter of 2019, and they’re expected to continue rising in 2020 due to inadequate reserves and large transportation losses (source 1, source 2). Finding excess coverage for construction in New York is more difficult than ever as commercial auto losses hit excess lines. The East Coast is seeing carriers increase deductibles from $25,000 to $100,000, making it difficult for insureds to obtain affordable insurance. Many smaller New York contractors are attempting to ride out the hard market with general liability only, while others are merging or closing their doors because they can’t afford to stay in business. In the West, and especially in California, customers can expect to see premiums reach at least 20% of wildfire coverage limits, if the coverage is obtainable at all.
PRESSURE ON CAPACITY RISES
Rising premiums are only part of the challenge facing brokers and policyholders. As rates have gone up, capacity limits have continued to shrink. While the changes in limits have mainly been felt by larger policyholders, the market changes are also trickling down to affect mid-market accounts (source). As insurers take big hits from jury awards, some have chosen to leave the market, but new carriers aren’t entering, causing limits to keep dropping and driving up attachment points (source 1, source 2). In the past, $1M was generally the rule when it comes to personal umbrella coverage, but today’s markets are pushing attachment points to $2M or higher. In the commercial sector, $10M - $15M lead umbrella limits have replaced $25M lead limits without any corresponding drop in premium. Commercial auto will also continue to be a difficult area. Policyholders with a mid-size auto fleet may only be able to renew up to half of their previous program limit, requiring several carriers to reach previous aggregate limits. Agents should expect difficulty assembling the umbrella if the auto premium is larger than the general liability premium or if an auto fleet is small but heavy.
Although limits are dropping, there’s still plenty of market capacity – carriers are just selling that capacity in thinner layers in an effort to utilize capital judiciously (source 1, source 2). Thinner layers are making it difficult for policyholders to maintain the program structures they’ve had in the past. In prior years, carriers would often put up limits in separate tower layers, but in the current market environment, carriers aren’t willing to come back in above their initial limit even if there’s a gap in the tower (source 1, source 2). Brokers are now building excess programs using $5M and $10M layers when only a year ago it was possible to fill out a $100M tower with just 4 or 5 insurers (source). In 2020 it will be increasingly important to try to get as much lead limit as possible in the first $25M of a tower. Then, once the market feels that the price is appropriate for a certain layer, carriers will start to compete for the business. When it comes to excess coverage in 2020, brokers and agents will need to be more creative to help stretch that capacity. One solution may include exploring quota share options when building a program tower above $50M. Carriers aren’t always willing to take on a full layer, but providing them with a partner to share in the risk builds confidence and may make them more willing to do it at the right premium. Finding the creative solutions this market demands will require that brokers and agents start collaborating earlier and with a proactive mindset.
The excess and umbrella markets are changing rapidly, and the potential impact on policyholders includes double or triple-digit premium increases and tighter coverage conditions. This current atmosphere of more selective risk taking, tighter underwriting, and less competition is expected to be more intense and last at least 18 months, if not longer (source 1, source 2). Wholesalers will continue to play a major role as more business is pushed out of the standard markets due to escalating jury awards that are upending claims loss ratios. Already, underwriters are reporting substantial increases in submission flow (source). Agents need to be proactive in setting appropriate pricing and limit expectations with clients and ensure that submissions include all pertinent data.
A strong relationship is more critical than ever before. Agents that partner with CRC Group can assure policyholders that they’ve scoured the excess wholesale market and explored all options to secure the best possible deal. We have amassed the largest collection of actionable data and analytics in today’s wholesale industry, and our teams put that information to work, consistently delivering better outcomes for agents and policyholders through our REDY platform.
Contact your CRC Group producer to discuss how we can best help your clients when it comes to their excess and umbrella coverage needs.
- Josh Chassman is a Senior Broker with CRC's San Francisco office and member of the Casualty Practice Advisory Committee. He has been part of the wholesale insurance business for more than 20 years and focuses specifically on Casualty.
- Frank Dias is an SVP and National Casualty Practice Leader. He's also a member of the Casualty Practice Advisory Committee. Frank specializes in Construction and Environmental Insurance.
- Craig Nettles is a Broker in CRC’s Atlanta office, handling a large portfolio of General Liability, Casualty, and Environmental Insurance business all across the country and a member of the Casualty Practice.
- Jake Scott is an Associate Broker in the CRC Dallas office where he focuses on Casualty Insurance and is a member of the National Casualty Practice Group.
- Rina Visconti is a Senior Broker with CRC’s New York office where she specializes in Casualty Insurance and is a member of the National Casualty Practice Group.