We know that Umbrella claims are often recognized much later than primary claims, and slow development pushes full claim recognition even further into the future. This is particularly true for carriers who don’t write the primary policy associated with the claim. Covid-related court delays in recent years may add to the volatility of Umbrella loss ratio indications. Accordingly, favorable Umbrella loss ratios in 2020‑2022 may not be indicative of a profitable product today.
- Chubb North America Commercial P&C recognized $96,000,000 of unfavorable development in 2022 from their Commercial Umbrella / excess portfolios, driven by higher-than-expected loss emergence and increases in their claims severity trend assumptions.5
- In their most recently approved Commercial Umbrella filing in Georgia, Liberty Mutual estimates expected loss ratio trend for Commercial Umbrella to be 15.5% annually.6
- Safeco’s February 2023 Personal Umbrella filing in Kansas notes that “Due to the increase in high severity auto losses being experienced across the industry, we must increase umbrella rates to ensure that we are able to pay future claims.”7
The Importance of a Healthy Umbrella Product
“We will address the Umbrella product in a year or two.”
“Our Umbrella product is so small compared to the rest of our portfolio.”
“Our company hasn’t had enough Umbrella losses to be concerned.”
These can be common reactions when the subject of Umbrella product updates is raised. Understandably, for many carriers the Umbrella product isn’t a top priority. Companies must weigh the repercussions of a poor Umbrella loss ratio against the effort required to maintain the product. What consequences might result from an increase in Umbrella loss activity? Could the health of a company’s balance sheet be at risk? Are ceding commissions susceptible to reduction on heavily reinsured Umbrella products? Will long-overdue filings asking for substantial rate increases be rejected? How will Umbrella insureds react to extreme premium or coverage changes?
Is there any product that remains strong over time when ignored? Umbrella requires the same attention as any other line of business.
Levers Available for Improving the Umbrella Loss Ratio
Rate increases are typically the first corrective action that comes to mind, and for a volatile product like Umbrella, producing reliable proof of rate need may seem formidable. Companies can cite severity trends, either in the industry or their own primary lines. Long overdue rate adjustments should be pointed out; compounding years of high severity loss trend with little-to-no-rate increases will automatically raise an Umbrella’s expected loss ratio. Are minimum premiums and ILFs adequate and comparable to those of peers?
It can’t be overstated that it is much easier on state regulatory agencies, and insureds, if rates are adjusted routinely and incrementally, rather than drastically in reaction to intensifying loss activity.
Rates are not the only lever available to companies looking to strengthen their Umbrella loss ratios. Other options exist that may require less of a time commitment or fewer resources than a rate increase.
Raising required attachment points could go a long way toward improving Umbrella loss ratios. Higher underlying limits could be required for all Umbrella accounts, or only for tougher exposures like youthful and senior drivers on Personal Umbrellas, and large / heavy fleets for Commercial Umbrellas. Was it the 1980s when the standard underlying CGL limit for Commercial Umbrella increased to $1 million?
In several recently filed Personal Umbrella filings, RLI increased the required underlying auto liability limit to $500,000 BI each person / $500,000 BI each accident / $500,000 Property Damage. If insureds carry lower limits of $250,000 each person / $500,000 each accident, or $300,000 each person / $300,000 each accident a premium surcharge will apply.8
Another available lever is the amount of capacity being offered. Recognizing the existence of limits drift (the propensity for larger claim settlements to occur when larger limits are available) and higher severity trends, companies might consider restricting available capacity on accounts with large loss activity or more hazardous exposures.
Successfully underwriting Umbrella business requires recognition of severity exposure and the value of a company’s capacity. For underwriters who regularly handle primary lines of business this necessitates a mind shift away from frequency underwriting. Conducting Umbrella training might help underwriters more smartly deploy the Umbrella product.