Softness continues in the
commercial umbrella market

RLI waits out the downturn with a conservative, long-run strategy

By Dave Willis

The commercial umbrella insurance market story is much like that of the rest of the P&C world: The market is soft. According to Mike Stone, president and chief operating officer of specialty insurer RLI, "Commercial umbrella has been soft for nearly five years, and the softness continued in 2010. Our prices were off on the magnitude of 5% last year."

His firm's results are in line with overall industry results. The Council of Insurance Agents & Brokers (CIAB) reports third quarter 2010 renewal rates for commercial umbrella were off an average of 4.4%—lower than the previous four quarters, but not by much.

"We don't see the overall casualty market improving," Stone adds, "and commercial umbrella is certainly not going to lead the hardening of the casualty market. For the most part, it's a lagging indicator—one of the last to move up."

Given continued downward pricing pressure, RLI has shrunk its commercial umbrella business over the past several years. "Our business is probably half what it was five years ago," Stone notes. "Policy counts are down on the order of 20% to 25%." Rates played a role in the decline, as did the overall economic environment.

According to Paul Simoneau, vice president of RLI's casualty brokerage business, the overall construction environment is behind the trend. "That's the real bugaboo," he explains. "A significant amount of what we and other surplus lines writers focus on are the construction trades. There's been so much decline in their activity, it's having an effect."

The effect is on volume, not profit. "Despite the fact that prices have been going down and our book of business has shrunk, we've been successful in actually turning a profit in commercial umbrella," Simoneau explains. "That's, in large part, because we've been willing to give up market share and pass on business that doesn't look acceptable to us."

Risk selection is important. "We employ experienced underwriters and we pick our spots, so to speak, selecting risks that fit our niche," Simoneau says. "That lets us turn a profit. It's a smaller profit, but our goal is to make money in good times and soft times."

Adds Stone, the company makes underwriting decisions "on a risk-by-risk basis. Our underwriters look at each risk. Over the last couple of years, there aren't any specific classes we've said we wouldn't write because of market softness." That said, the company tends to back away mostly from business where pricing is, as he calls it, "more aggressive."

"We don't expect to make a lot of underwriting profit, but unlike others, we're not going to run our commercial umbrella at a 110, 115 or 120 combined ratio," Stone says. "That's not acceptable to us, so we give up share."

Dedication to underwriting excellence plays out in company staffing decisions. "Despite the soft market, we're hanging on to our staff," Stone says. "We're not cutting back. Of course, under­writers like to write business, but we're telling them to be particularly careful. They're still looking at a lot of business, but just not writing as much."

According to Stone, this approach has a future focus. "It's important for us to keep our experienced underwriters," he explains, "so we are ready when the market does return to what we believe is an appropriate level."

The company isn't cutting back in other areas, either. "We are continuing to serve our customers—our brokers and policyholders—in a way that provides a high degree of stickiness, even in the surplus lines space," Stone explains.

According to Simoneau, prospects for any significant market change this year aren't particularly bright. "We expect the market and market pricing to be, for the most part, flat this year," he explains. "Growth won't really arrive until the economy improves and there's no indication that it is imminent. We suspect it will be a slow process this time around."

Adds Stone, "If we get a bit of an uptick in the economy, particularly in some of the larger states that have felt the brunt of the financial meltdown and housing crisis, things may improve. Short of an increase in construction activity, however, we think we'll bump along in 2011, fairly flat from a volume standpoint and a pricing standpoint."

Absent such change, one area that could spark a turnaround is insurance industry results. "We're waiting for some pain to be felt by our competitors," Stone says. "Frankly, that doesn't necessarily happen quickly—and certainly not in the commercial umbrella business. You can fool yourself for a long time in this particular product."

According to Stone, carriers aren't facing market challenges alone. "Retail agents and the brokers feel the same pain we do," he says. "And wholesale brokers are feeling it in spades, because the standard lines companies are writing a lot more of this business than they did five years ago."

He encourages agents and brokers to stay the course. "Hang in there," he says, "and make sure you're doing business with a highly rated company. This is the time that ratings matter. We're getting to a point in the underwriting cycle when companies that are writing bad business will start losing money—a lot of money. If they don't have surplus to back it up, they'll pull out of the market.

"They won't just raise rates," he adds. "Agents and brokers—and their clients—will be left hanging. So while financial security matters at all points in the cycle, it's particularly important now."

The author

Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.