The commercial umbrella market is hardening due to increasing loss frequency and severity, adverse prior year development, social inflation, rising premiums and a reduction in overall capacity.

Capacity has been shrinking since 2019, and premiums have been on the rise ever since. “The biggest factor driving excess capacity and premiums is the significant verdicts being awarded and passed down to carriers," says Angela Tam, vice president, brokerage manager, Burns & Wilcox. “Treaty restrictions and reinsurers dictating terms and conditions are other factors."

The combination of all these factors has resulted in considerably higher premium rates and reduced capacity.

“The traditional umbrella limit had been $25 million. However, in this transitioning market, we are seeing a $10 million limit being deployed as the new norm," says Nicoletta George, senior vice president, senior product line manager of excess casualty, AXA XL.

The capacity for excess layers has also been impacted. “Historically, it was common to see a $25 million limit being deployed for an excess layer. However, now we are seeing excess layers of $5 million to $15 million limits for certain industry segments," she says. “In some cases, insureds are not able to purchase the same limits they had in the past, because the capacity is simply not available or the renewal pricing is significantly more expensive."

In the past, large judgments against companies were rare and umbrella insurance was affordable, but certain classes of business are now difficult to place due to the large losses. “The toughest classes of business to place now are habitational, truckers with large fleets and risks with wildfire exposures—all of which have incurred large claims," Tam says.

In particular, “the habitational sector is seeing a dramatic contraction that agents need to prepare for," says Dave Eudy, associate vice president, excess casualty, Burns & Wilcox. “The typical insurance buyer often presents with multiple ownership entities accompanied by a larger schedule of underlying policies that can be difficult to underwrite efficiently. The result is that errors & omissions is a concern for every party involved in the transaction."

“Couple this concern with the fact that common claims to the risk, like slip and falls or violent crimes, can expose even the most carefully underwritten excess policy to a catastrophic loss," he adds.

Emerging factors such as active shooter events, rising auto verdicts and settlements, concussion litigation, volatile wildfire seasons, sexual assault and molestation claims, and agricultural chemicals like glyphosate and dicamba are also driving the market. As insurers take the hit for large jury payouts, many of them have left the market and have not been replaced by others.

“A massive shift in how juries attribute liability is contributing to rate increases as well, and rising litigation and rising defense costs are placing defendants on the hook," George says. “Verdicts reaching millions and even billions of dollars in jury awards are becoming commonplace, a result of social inflation."

Adding to the list of emerging risks impacting the market is the COVID-19 pandemic, which “has resulted in the application of infectious and communicable disease exclusion," says Dennis McGuire, casualty technical underwriting director at Nationwide.

Concerningly, there has been “an uptick in environmental contractors getting into disinfection as well as more janitorial services getting licensed to provide COVID-19-related cleaning services," Tam says. “We have also seen more manufacturers offer personal protection equipment products, including those made in China, seeking coverage."

The excess and umbrella markets have been changing rapidly and significantly since last year, and the impact being felt by policyholders could last for the next 18 months or more.

Olivia Overman is IA content editor.