2003 CAS Seminar on Reinsurance Commercial Umbrella Thomas L. Ghezzi, FCAS, MAAA June 1-3, 2003 Sheraton Society Hill Philadelphia, Pennsylvania This document was designed for discussion purposes only. It is incomplete, and not intended to be used, without the accompanying oral presentation and discussion.
Commercial umbrella has been affected adversely by the factors affecting commercial auto and general liability • Significant “problem areas” include • Construction defect and mold • New asbestos defendants • Expanding UM laws • Terrorism
Profitability of Commercial Umbrella declined significantly through the 1990s • Primary causes include • Rate reductions • High inflation • New causes of loss • Generally static terms and conditions.
Recent large price increases and coverage improvements have been achieved. • Average rate level on Commercial Umbrella business has improved substantially • Terms and conditions had been improved. • Loss ratios peaked in 1999 and have improved since then • It is likely that the industry still operated at a loss in 2002.
Profitability varies significantly by business segment • Regional or “supported” business has performed consistently better than national accounts or “unsupported” business • Particularly difficult classes include • Fortune 1000 • Heavy construction • Heavy habitational • Heavy products • Heavy automobile
Umbrella coverage basics • Umbrella policy is excess of multiple underlying coverages • Generally automobile liability, general liability and employers liability • Can include other liability exposures • Underlying limits have generally been $1 million per occurrence or higher • Trend toward higher underlying limits • especially on commercial automobile
Umbrella basics, continued • Forms include • Follow form excess - generally larger risks • Standard umbrella - generally smaller risks • Leading writers • AIG, Chubb, Kemper, Royal, Zurich
Accident year projections for eight national accounts and four regional programs Observations • Ratios rose through 1999, and improved steadily since then • Regional accounts significantly lower and less volatile than the national • greater underwriting discipline • absence of large, complex risks • more likely “supported business” Average = - - x - - Source: Casualty Actuarial Society presentation, Spring 2002, and Tillinghast analysis of other programs.
Adding a large national carrier for years before 1997, we calculate an approximate industry composite loss ratio for 1992-2002
Following years of rate reductions, significant increases began in 2000 Sources: (1) For 1997 and later, from Travelers Insurance Company web site; 1992-1996 based on Tillinghast analyses. (2) Published by Conning and Company. (3) Based on Tillinghast analyses.
Survey information published by the Council of Insurance Agents and Brokers provides additional insights into recent rate activity Observations • The CIAB surveys indicate • the rate increases continued a trend that started before Sept. 11 • policy terms tightened with higher deductibles, lower limits, and greater exclusions • the market is very tight on contractors • “the umbrella market has gone wild” • growth in self-insurance, alternative markets, “going bare” (1) Source: Council of Insurance Agents and Brokers (CIAB). Based survey of producers tracking quarterly renewal premiums relative to premiums on expiring policies. Percentages shown are weighted averages of CIAB data, using the mid-points of rate change ranges provided.
Adjusting the composite loss ratios for estimated rate changes allows us to evaluate umbrella loss trends over the last decade Fit 92-99: Avg Annual Rate of Change = 13.4% Fit 92-02: Avg Annual Rate of Change = 7.8%
This trend analysis implies several changes have taken place in this time period • Steep trends through 1999 • Umbrella loss trends of +13.4% from 1992 to 1999 • Likely due to coverage expansions, leveraged effect of underlying trends, etc. • Moderation in trends since 1999 • Likely due to stricter terms • Increased attachment points • Change in mix of business
Umbrella coverage is exposed to issues experienced by General Liability and Automobile Liability coverages • Terrorism • Construction defect • Mold • Sexual misconduct • Expansion of UM laws • EIFS • Asbestos litigation Observations • In the case of umbrella, the leveraged effect magnifies their impact on profitability. • Many markets are avoiding risks with related exposures, or are imposing high attachment points, low limits and policy exclusions.
The current climate calls for improved underwriting processes • Best in Class Underwriting Process includes the following • Exposure analysis • Loss control analysis • Re-rate the primary policies if unsupported • Dedicated underwriting staff • Consistent terms & conditions throughout placement • Financial analysis of the insured & carriers
There also needs to be a greater focus on claims processes • Claims Management issues include the following • Prompt notification of losses • Underlying claims adjustment • Allocation of expenses • Claims expertise • Know litigious climates • TPA involvement
Relative assessment of market segments indicates better historical performance for small to mid-sized risks, with underlying coverage Notes: Least profitable/Most unprofitable Middle profitability Most profitable/Least unprofitable
Estimated Umbrella Loss Ratios(Auto and General Liability weighted 50/50) Observations Based on loss ratios for auto liability and GL, we estimate loss ratios among states for umbrella COLOR denotes estimated umbrella loss ratio: Red: Highest third; Yellow: Middle third; Green: Lowest third. PATTERN - Solid: Both auto and GL in the same category; Shaded: One of the two coverages in the category. Source: Tillinghast analysis of information published by A.M.Best