A World of Opportunity Exists Under the Umbrella Market

By Steve Fall | September 6, 2004

While it’s hard to find many positives about today’s increasingly litigious environment, it has helped fuel the need for both personal and commercial umbrellas.

“We’re seeing an increased demand for personal umbrellas,” said Michelle Kenney, a senior director of personal insurance for Fireman’s Fund. “More customers are seeking them out, probably for a variety of different reasons. We have also been noticing increasing damage awards, so people are finding a greater need for umbrellas.”

The main reason to buy a personal umbrella becomes apparent from just reading through the newspaper.

“Any time there’s a bad accident in this country, someone is at fault and someone’s paying the freight,” said Paul Buse, president of the Independent Insurance Agents and Brokers of America’s Big “I” Advantage Products and Services team. “They’re going to look to that person’s policy and their policy limits. If you don’t have them and you have assets, then you’re vulnerable. So that’s the mantra of the personal umbrella sales process: make people aware just how easy it is to go through $100,000 per person or even $250,000.”

According to sales trends, agents and brokers have succeeded in this respect.

“There’s been an increase in the demand for personal umbrellas as agents become more aware of this exposure,” said John Moran, vice president of personal lines for Lexington Insurance Company. “In the litigious nature of today’s society, one accident could be someone’s financial ruin if they’re not properly protected. So more people are interested in buying umbrellas to protect their assets. Home values have increased significantly the last few years, which is also leading to increased demand for this product line.”

“There’s been an ongoing push by agents in general, to make people aware that even a $100,000/$300,000 personal auto policy is not a whole lot if you create a dramatic accident or really injure somebody. So, more and more people are buying umbrellas,” Buse said.

The typical personal umbrella policy provides $1 million in coverage, and sits atop the underlying auto and homeowners policies’ limits. Some insureds now realize that even a million dollar umbrella may not be enough.

“We continue to see requests for higher limits,” Kenney said. “It used to be if someone had $1 million or $2 million they thought that was enough, now we’re seeing an increasing number of requests for $5 million or $10 million in coverage, or even higher than that.”

Buse also pointed out that an umbrella can save someone from the nightmare of having to pay their own defense costs.

“About every time you have a claim that pierces into the umbrella layer, you’ve got a catastrophe where, if you didn’t have it, peoples’ lives would change dramatically. Not only do you get the liability coverage, but the really important thing is that you don’t lose your defense. If you have a big loss, they’re just going to tender their underlying policy limits and say ‘it looks like it’s going to pierce the total, here’s a check, but you have to defend yourself.’ That’s a big surprise. But if you have the umbrella there, that doesn’t happen. The umbrella is on the hook and it does provide defense coverage.”

Moran summed up a win-win situation. “An umbrella really closes all the gaps and provides that high limit protection to give an insured peace of mind. For agents and brokers, it’s another revenue stream for them because they’re earning a commission on another line of business.”

Sales opportunities abound
Although more people are buying them, there still remains a huge opportunity for growth in the personal umbrella market according to Moran. “Not a big percentage of the population buys this coverage.”

Once considered a coverage for the rich and/or famous, agents and brokers could find prospects for personal umbrellas where they least expect them.

“We are seeing some trends that the normal everyday American is starting to think in terms of umbrellas,” Kenney said. “So we’re seeing an increase in what we call the middle market customer buying umbrellas as well.”

“In terms of the people who buy umbrellas, it’s really across the board,” Buse said. “You used to think about the doctors, lawyers, and the professionals with a lot of assets as being the target market. Now you’ve got pretty much anybody who has their own home and any kind of net worth looking at an umbrella as an important piece.”

“It’s really a cross-section of all occupations,” Moran agreed.

The commercial umbrella marketplace
Many of the same factors that make personal umbrellas desirable have also increased demand for commercial umbrellas.

“I don’t think there’s a financially sound company out there that wouldn’t buy an umbrella,” said Bob Shine, executive vice president, excess casualty, Zurich. “Everybody purchases excess liability insurance—from small companies all the way to up Fortune 500.”

“The purchase of a commercial umbrella is an acknowledgement that the company’s assets could be drained by a lawsuit,” said Mark A. Brewer, the national director for umbrella and excess liability programs for St. Paul Travelers. “Why would any insured want to ‘take the bet’ of self-insuring millions of dollars of liability limits in today’s legal climate? Based solely on the limits involved, the umbrella is even more important than the insured’s primary program in protecting the insured’s balance sheet.”

“For companies, it’s an easy sell today in my opinion. Any time you open a newspaper today, it’s very easy to see that organizations are getting a lot of lawsuits,” said Gregg Calestini, the chief marketing officer for American Wholesale. “That can often times be the ‘big pop.’ So it’s very important to have this coverage, because most organizations cannot afford those catastrophe claims.”

Such press coverage helps establish the need for commercial umbrellas to businesses of any size.

“Today there are more and more clients turning to their retail agent and saying ‘I need a solid umbrella alternative here.’ So I think it is certainly a growing sector,” Calestini said.

“As businesses start to grow in revenue and exposures, clearly you need to look at whether their current limits are adequate,” said Nadine Silva, Fireman’s Fund’s vice president, excess and special risk. “With the market starting to soften—not soft, but soften—it becomes more attractive to possibly buy higher limits at this point.”

A commercial umbrella covers losses above the limits of underlying basic commercial liability policies. It also fills gaps in coverage.

“If I were a broker, I would tell any insured that—with the legal environment in which we live—to not buy an umbrella would be very risky,” Shine said. “You can’t say that just because you haven’t had an issue in the past, that you wouldn’t have one that would require excess liability coverage in the future. Everybody is exposed to lawsuits. The size of lawsuits and the size of product liability, premises liability, and auto liability verdicts and settlements have continuously increased almost every year that I can think of.”

Silva pointed out how commercial umbrellas could also save agents and brokers from an errors and omissions claim. “You want to make sure that you’re covering, as broadly as you can, any potential gaps in coverage. Umbrella is designed—with the coverage A and coverage B aspect—to pick up the gaps that aren’t necessarily recognized on the underlying program.”

So, which industries are buying commercial umbrellas?

“Retailers and wholesalers—service-type operations where hard product is manufactured but it’s a service that’s being sold,” said Scott Reynolds, the chief actuary for American Wholesale. “Those products are selling very well today at profitable rates. It’s a win-win situation there.”

“The predominant industries we see where more capacity is being consumed is the leisure hotel real estate sector—manufacturing continues to be a big buyer—but the first category is probably the largest one by far,” Silva said. “Also, wholesalers and distribution risks. Contractors and trucking are so specialized. There certainly is high demand, but the market availability fluctuates based on the volatility that you see and the results.”

Great insurance value
Some insureds may be surprised to learn that it often costs less to purchase a personal umbrella policy than increase their liability limits on auto policies.

“It’s a relatively inexpensive cover for the value that you get out of it,” Kenney said.

“It usually is (less expensive than increasing auto liability limits),” Moran said. “And the umbrella not only covers your auto exposure, it covers exposures with your homeowners or if you own a boat. It’s a broad-based coverage.”

Many industry Web sites emphasize the importance and affordability of this coverage as well, which can only help with the sales process.

“As people became more educated with the Internet, they found out that this is a relatively easy product to purchase. And often times it is surprisingly inexpensive for adding a million dollars in coverage over and above everything else,” Buse said.

What’s ahead for umbrellas?
The experts anticipate little in the way of personal umbrella pricing changes in the next year or two. Buse expects nothing more than inflationary increases in the near future. “The personal umbrella side is just not as volatile as the commercial. It’s a much more stable market on the personal side. You’re not going to see any big spikes.”

“In the personal lines market, we’re seeing it be pretty stable,” Kenney said. “I’m not seeing a lot of rate action significantly up or down. So unless we see some significant negative development on trends, I expect it to be pretty flat.”

That doesn’t mean there won’t be changes of other kinds. Buse believes carriers may begin requiring higher underlying limits than the typical $100,000/$300,000. He also believes there may be stricter underwriting on the umbrella policy itself for certain risks—such as households with younger drivers—instead of relying predominantly on thorough underwriting of the underlying auto policies.

“I think that we will see no significant rate increases or decreases in the next year,” Reynolds predicted for the commercial umbrella market. “In 2005, it may depend on what’s happening with the industry in general. In my opinion, umbrella is related to the performance and what’s happening in the rest of the market, but it’s not always the same. We’re seeing that some property and casualty rates have gone down recently. And if that trend continues into 2005, you may see some pressure on the umbrella market from the insurance buyer for more rate relief there as well.”

“In the near term, I think we’ll see a little bit of softening because we’ve come off somewhat of a hard market. But I don’t think we’ll see that continue in the long term. Strict financial discipline will require that we do the right thing as an industry,” Silva said.

Brewer explained how the long tail on commercial umbrella makes it a challenge to write profitably. “Despite pricing improvements of the past several years, the umbrella market continues to deal with a continual upward movement in loss costs. The increased loss costs are driven by increasing medical costs and jury awards. Umbrella is one of the longest tail lines of casualty business, so accident year results are difficult to predict and take a number of years to settle out.”

Reynolds believes that the rate increases taken in recent years make this a good market to target. “Even before we saw the hardening of the reinsurance market and 9/11, umbrella was already starting to get corrected. We saw a dramatic increase in commercial umbrella rates. They have been going up 50 or perhaps 100 percent higher than the standard market rates. And what that presents today is a line of business that offers a lot of profit and opportunity.”

Topics Auto Agencies Excess Surplus

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