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Excess liability capacity shrinks as rates shoot up

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Buyers of excess liability and umbrella coverage faced the one-two punch of soaring rates and a capacity crunch at July 1 renewals, market sources say.

Some policyholders paid more for coverage and some bought less, while others were unable to achieve their past or desired levels of protection, they say.

In addition, insurers introduced more exclusions as they tried to limit their exposures, particularly for historic sexual abuse and molestation claims.

Commercial auto rates are also seeing rate hikes, after several years of increases, and primary general liability rates are rising but at a lower rate, sources say.

Excess and umbrella insurance markets have seen the exodus of some $500 million in capacity, said Anthony DeFelice, managing director, national casualty in New York for Aon PLC’s risk services division. The largest coverage tower achievable is roughly $500 million to $600 million in limits, down from about $1.2 billion last year, he said.

Policyholders that “buy the market” could previously have built $1.2 billion, but now can access only $600 million in total capacity, agreed Jon Drummond, New York-based head of casualty broking, North America, for Willis Towers Watson PLC.

It has been challenging to fill out towers in some cases, and, “when you can, sometimes its double” the cost, said Douglas O’Brien, USI Insurance Services LLC’s national practice division manager for casualty and alternative risk in Hoboken New Jersey.

“We’ve had many clients voluntarily cut back in limits because of cost or you can’t fill out the tower,” Mr. DeFelice said.

The average rate increase across the Aon book for larger accounts was about 30% during renewals, Mr. DeFelice said, but some accounts, such as higher-hazard risks, saw triple-digit increases. “It’s been absolutely mindboggling,” he said.

At Willis Towers Watson, 92% of clients saw rate increases during July 1 renewals, making the second quarter the period with the highest percentage of accounts with increases in more than 10 years of data collection by the brokerage, Mr. Drummond said.

For lead umbrella layers, average limits have been cut from about $25 million to $10 million in most cases, making it harder to assemble large blocks of capacity, said Mr. O’Brien of USI. “What normally took us four or five carriers to fill out the first $100 million now takes eight to 10.”

“We’ve seen an increase in required retentions, underwriting limits and attachment points,” said Dan Aronson, New York-based U.S. casualty leader for Marsh LLC. The first $50 million of limits might now require some three markets, whereas the lead umbrella insurer previously took the first $25 million or even $50 million, he said.

“The standard lead limit is now $10 million, not $25 million, and attachment points have shifted up,” said Donnacha Smyth, head of excess casualty for Axa XL in North America, a unit of Axa SA, who is based in Dublin. Umbrella coverage previously typically attached at $1 million but “now $2 million is becoming more the norm.”

Mr. Aronson said building umbrella limits takes longer as more parties are involved and the individual insurers offer lower limits, he said.

Negotiations “absolutely” have taken longer, Mr. Smyth said. “We’re facing situations where some towers are not in place by the expiration date. … We haven’t seen that in years.”

The placement process “continues to take longer and longer,” said Jessica Cullen, New York-based managing director, casualty practice at Arthur J. Gallagher & Co., with clients also looking at more options.

Gallagher presented one financial institution client with 11 coverage choices, from a negative rate change to a 100% increase, which involved keeping the incumbent insurer and attachment point, according to Ms. Cullen.

She recommended policyholders be flexible. “If you want $25 million lead over ($1 million), you’re going to pay for it,” but buying $10 million over $2 million “might achieve a better outcome,” Ms. Cullen said.

Even policyholders with few losses are being affected.

USI’s Mr. O’Brien said a policyholder that historically bought $200 million in limits and whose largest loss in 20 years was less than $1 million, saw coverage costs rise 2.3 times and adjusted by cutting back to $100 million in limits.

Meanwhile, insurers are introducing exclusions related to sexual abuse claims and the so-called revivor statutes passed in states such as New York that retroactively extend the statute of limitations on such crimes.

“One we’re seeing is the advent of sexual abuse and molestation exclusions,” Ms. Cullen said. 

“There are a number of industry classes where we are introducing exclusionary language around sexual abuse,” Mr. Smyth of Axa XL said, including universities and health care systems.

The amount of coverage available for sexual molestation coverage is “significantly down,” Mr. Drummond of Willis Towers Watson said. Rates are climbing for the coverage and “it’s hard to get,” he said.

Meanwhile, commercial auto, especially accounts with large fleets, continues to see primary and umbrella rate increases even after years of hikes, sources say.

Primary commercial auto cover has seen double-digit rate increases, said Chris Kopser, head of global risk management for Axa XL, even as primary general liability risks see only single-digit increases or even flat renewals.

Large fleet owners are under the most stress, Mr. Kopser said, but the reinsurance market for primary commercial auto is “robust” and allows for some maneuverability.

Umbrella and excess markets, however, are starting to feel the pull of rising reinsurance markets.

“The reinsurance market is beginning to tighten up on COVID-19 and putting exclusions on treaties. That’s starting to impact appetite on the direct side,” said David Perez, chief underwriting officer, North America on primary and excess general liability for Liberty Mutual Insurance Cos. in Boston. “We’ve heard that a lot of 7/1 treaties have gotten COVID exclusions,” and that is expected to carry forward.