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The sustained uptick in loss activity on Personal and Commercial Umbrella products is a growing concern for insurers. Vulnerable loss limits, elevated case values, and aggravated damages are fast becoming the new normal. Despite the challenges they face, insurers can and should take steps in both underwriting and claims management to mitigate losses.
Commercial Umbrella loss ratios started rising in 2012 and, although there was a Covid-related dip, the upward trend has continued as courts work through the lockdown backlog. The message is clear: A decade ago an average single-person loss that would be contained in primary limits is now well into Umbrella limits, and the tail associated with Commercial Umbrella claims has likely been underestimated.
There’s nothing materially different in terms of the character of the risks, but pricing simply hasn’t kept pace with claims and inflation. Many insurers are relying on rate increases in primary lines to earn into the Umbrella. However, Umbrella rates, Increased Limit Factors (ILFs) and minimum premiums have largely remained unchanged.
While some positive rate is flowing into the Umbrella, it tends to be limited to the first or second million of Umbrella limits, with excess limit pricing remaining virtually unchanged. Compounding this, and despite the severity, Umbrella limits have been readily available and provided as a matter of course. As companies put up more capacity, when they do have a loss (or multiple losses), there’s not enough premium to keep the loss ratio at an adequate level.
The pressures on Umbrella loss ratios took many package underwriters by surprise because, historically, Umbrella products don’t receive the same continuity of underwriting attention as primary lines. The reality is that case values are up significantly from where they were a decade ago. Companies that experienced minimal to no Umbrella loss content historically are seeing increased activity. Even carriers with established portfolios and dedicated Umbrella underwriters are seeing an uptick in both frequency and severity of Umbrella losses. As a result, small and large carriers alike are revisiting their Commercial Umbrella strategy. In addition to pricing considerations, many have taken to reducing limits and/or restricting class eligibility. While the “reset” strategy is sound, the nature of Commercial Umbrella loss and the related tail portend several years of potential adverse development.
Increased (and tougher) plaintiff attorney involvement has played a role in rising costs, but the whole claims environment is conducive to it. Soaring social inflation, nuclear verdicts, a sophisticated plaintiffs bar, litigation funding, and higher frequency and severity due to distracted driving and/or cell phone usage, for example, are the main factors.
As insurers and reinsurers, we expect losses, and we meet our obligations – that’s why we’re here. But the extent to which the loss dollars are flowing and how aggressively they’re being pursued is concerning. Plaintiffs’ attorneys are focused on finding negligence and extending it to gross negligence, where losses go much further than expected. Hedge funds are also getting in on the funding litigation act, and now even smaller carriers are in their sights.
A smaller mutual company may think it’s safe because they only put up $5 million in limits, but we’ve seen examples where plaintiffs’ attorneys pull them in, along with a few other companies, so the plaintiffs can compile the limits.
What can insurers do to help mitigate losses? Sometimes it’s clear that claims are due to negligence on behalf of the insured, inadequate supervision, or a process that doesn’t meet code. Taking shortcuts, gross negligence, and/or reckless conduct on the part of the insured frequently leads to aggravated general damages and/or or punitive damages.
In instances where aggravated damages are awarded, the whole case value rises if a plaintiff can prove egregious conduct on the part of the insured. A common example is when the insured is unable to find qualified drivers, but they need to get their trucks on the road. The insured hires a newly licensed commercial driver and doesn’t have time to properly train them, or perhaps the insured didn’t do an adequate background check. Such shortcuts have the potential to result in an aggravated damages award.
Despite the challenges, underwriting and claims management by insurers can also help reduce losses. Here are six steps insurers can take to mitigate aggravated damages:
Umbrella underwriting requires a different mindset than primary underwriting. It is not just an extension of the type of losses underwriters might be contemplating in the primary policy. This is where risk selection really comes into play, and where we see the most potential for things to go wrong.
Carriers need to do a little self-analysis: are they putting out too much limit? Are risks appropriately priced? Is underwriting properly executed? How can they mitigate some of the risk?
Whether a carrier is offering $1 million or $25 million of Umbrella limit, capacity should be reserved for best in class, adequately priced risks. Risk-return assessment is a skill set requiring constant reinforcement. While most underwriters are comfortable differentiating risks within the same class, they don’t always make the correlation when quoting or authorizing an Umbrella limit.
Also challenging is the Umbrella rating process, where quoting efficiencies, rating algorithms, and/or pricing worksheets have been designed to price to maximum limits. Over time, underwriters may become immune to the process, allowing the algorithm to make the decision of how much Umbrella limit can be offered and at what price. By its very nature, Commercial Umbrella can be highly leveraged (big limit, small premium), making the long-term success of the product dependent upon the underwriter making decisions that are aligned with, and independent of, their evaluation of primary lines (or, where applicable, all underlying insurance).
Carriers would do well to remember that Umbrella insurance was never intended to be a product that’s designed for losses every other year. The dramatic deterioration of the Umbrella market’s loss profile shows that insurers must take steps now to get loss ratios and allocated loss adjustment expenses back on target.
We encourage you to reach out to your Gen Re account executive with any questions. Whether it’s to do with underwriting, loss prevention techniques and tools, or claims management, we can help.
