The Commercial Umbrella market has gotten some needed attention over the last few years – but not in a good way. What was once a steadily performing line of business has become a significant challenge, one that is impacting carriers’ (and reinsurers’) bottom lines. This shift has drawn considerable attention to the underlying issues, potential solutions, and what the future might hold.

Challenges Facing the Industry

• Most companies are taking Umbrella rate action, aggressively managing capacity, tightening risk selection, and modifying or restricting terms and conditions. Is more action needed?
• Earnings calls consistently offer commentary on Casualty Prior Year Development – unfortunately, it tends to be adverse. Will this trend continue?
• Loss trends remain in the teens – “social inflation,” an aggressive plaintiffs’ bar, and sympathetic juries are the main contributors. Is this the new normal?
• Loss Development Pattern emergence indicates troubling evidence that actual performance will be worse than expected. Will LDFs continue to lag?

If you answered “yes,” “maybe,” or some variation thereof, you will want to pay particular attention because the data suggests that casualty losses, particularly Umbrella losses, continue to be underestimated.

Considerations

Carriers often rely on industry data as either the sole basis for making loss ratio selections or, if their portfolio is large enough, a means to test assumptions made on their own book’s actual and expected results. Often, the analysis may be done with loss development factors by utilizing a weighted average based on an established set number of years. Interestingly, as the graph below demonstrates, using a seven-year weighted average over time the loss emergence pattern appears to be slowing. Observing the 60‑month timeframe, as an example, note the initial 2019 indication projected reported loss to ultimate loss at 74.2%. For 2024, the 60‑month percentage of reported to ultimate fell to 68.3%, a drop of 5.9% points.

Slowing Loss Development Patterns (LDFs)

Percentage of Reported to Ultimate – Based on ISO Commercial Umbrella 7‑Year Weighted Average

Why Is This Important?

With each annual update, and for all the concerns stated above, losses are taking longer to reach ultimate. Selecting expected loss ratios, critical to pricing and risk selection strategy, with any level of confidence adds to the challenges facing Umbrella writers. A “miss” will take a few years to show up in any carriers’ results and likely impact multiple accident years.

To be sure, the proactive efforts carriers are taking provide some much-needed loss ratio relief, but a “one and done approach,” or delayed or incremental action will only continue to mask actual results. Equally as important as maintaining underwriting discipline, actuarial and underwriting teams must continuously scrutinize data to ensure that ultimate loss ratios align with expected loss ratios.

If slower development becomes evident, the relative effect on ultimate loss ratios can be material. We will explore this further and offer best practices for analyzing Commercial Umbrella data in part two of this series, so stay tuned.