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Umbrella and Excess Market Update: Reinsurance, Large Settlements Driving Up Cost 

Carriers are targeting rate increases of 8% or so on their books, with most of the increase needing to come in the lead layer.
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umbrella and excess market update: reinsurance, large settlements driving up cost 

As 2022 came to a close, one thing remained consistent in the umbrella and excess casualty insurance marketplace: inconsistency. Very simply, the casualty market is being driven by a supply-and-demand shift in the excess casualty capacity.

The continuing lack of supply in the lead layer and for hazardous businesses has increased rates in this sector by approximately 7.5%. However, there's more supply than demand in excess of $10 million, which has driven competition that's led to program restructuring and rate stabilization or, in some cases, reductions.

On a macro level, the excess market appears relatively consistent, but on a micro level, it can be challenging to predetermine accounts that will be oversubscribed versus undersubscribed on capacity.

Initial Excess Casualty Expectations for 2023

Carriers are targeting rate increases of 8% or so on their books, with most of the increase needing to come in the lead layer. There is a slight uncertainty around treaty renewals—most excess casualty renewals happen between March and July.

Claim inflation, medical inflation and legal inflation will all continue, as well. And a significant amount of competition, an excess of $10 million, will remain throughout the year.

Additionally, there's likely to be more scrutiny on underwriting diligence and less support for those who are still trying to enter the umbrella and excess marketplace. A few of the new market entrants have pulled back on writing new business or regrouping on their business plans. Reinsurance is most likely a component of this trend, as reinsurers deploy their finite amount of capacity and look to balance underperforming sectors of their overall book.

Carriers Getting Creative to Offer Additional Capacity

During the third and fourth quarters of 2022, a handful of carriers increased their participation in lead layers. This increase happened on lead $5 million placements that stretched to $10 million, lead $10 million that went to $15 million and, most surprisingly, lead $2 million on auto-driven exposure rose to lead $5 million.

A few of these carriers were securing facultative reinsurance for the additional capacity they were offering. They undercut the market by eliminating their ceding commission and taking the capacity net-net. While this approach could be a good short-term decision, it may not be sustainable and the insureds that benefitted from these changes in 2022 could see higher-than-average increases in 2023.

On a similar note, carriers that were mitigating overall increases across their book had used the strategy of sometimes buying less treaty reinsurance and deploying more net capacity, therefore not passing as much of a cost increase onto customers. However, as losses continue to roll in, more reinsurance is being purchased, with premiums likely to continue to rise—albeit not at the pace seen in recent years.

Large Settlements Drive Up Costs for Everyone

One of the biggest challenges the brokering community has experienced over the last three years is conveying to buyers why their pricing is going up and why they are being "penalized" when they have never had a large claim.

While the challenge of the conversation isn't going away, we think it's important to openly discuss the causes of increasing costs on a macro level. Plaintiff's attorneys are using two strategies that lead to higher payouts than previous similar claims:

  • Time-limit demand. When the plaintiff's attorneys state that a carrier is acting in bad faith if it doesn't respond within a specific timeframe.
  • Stowers doctrine. An extra-contractual duty on insurers to act in good faith when deciding whether to reject a pretrial settlement offer that's within their policy limits. If the insurer rejects the pretrial offer and loses the trial, and the verdict is above the limits of liability the insurer offers, that insurer may be liable to pay the entire judgment, even the value above their limit. This can reduce the ability of carriers and insureds to take time for discovery, digest all the facts of the claim and create a counterargument.

The increase in claim settlements will continue to have an impact on market pricing as it drives up loss costs, requiring carriers to increase rates to remain in business.

A Look Ahead

A lot of positives in the current umbrella and excess marketplace should lead to much more stable excess liability renewals for 2023 on a macro level.

Results will probably remain inconsistent on an individual account basis, and a small percentage of buyers won't benefit from the same results as their peers. This abnormality can be driven by a small factor that has little to do with the individual insured or a change in their risk profile.

The most important thing agents and brokers can do for their clients is to secure accurate and comprehensive renewal specifications and exposures to present to carriers, communicate effectively, and involve all incumbent underwriters to get a better understanding of what they anticipate. Additionally, agents and brokers should leave plenty of time before the effective date, as the majority of the underwriting community doesn't have the full authority they had in years past to make difficult decisions.

Adam J. Mazan is vice president, Pacific region, for Risk Placement Services (RPS) and Russ Stein is area senior vice president for RPS.