Difference between umbrella and excess insurance? Also, papers on pricing these insurances?

Professional Actuarial Topics Property/Casualty
#1

Ahoy, hoy,

What’s the difference in terminology between “Umbrella” and “Excess” ? Are these essentially synonymous? For example i’m searching for how competitors operate their programs and what comes up in the search results are often “Commercial Umbrella and Excess” and i wonder if that phrasing is redundant. Is it? Why is necessary to use the phrasing “Umbrella AND Excess?”

Further, is there actuarial literature on umbrella pricing? I’ve seen inconsistent approaches between commercial and personal lines in the industry. I’ve seen personal lines arrive at basic charges (and minimum premiums) depending on what the umbrella is sitting on top of, but for commercial, the first layer of premium(1m) is often a straight multiple of the premium for the underlying policy.

Why might this inconsistency make sense?

Also, when it comes to umbrella pricing, is the below paper from the exam 8 syllabus the only literature on excess pricing? Does include circumstances for pricing where there’s minimal or no claims in the excess layers? Like if you have very few claims in the 1m-11m range, what’s the pricing approach? I believe there could be curve fitting, or an approach from a paper i forgot where you can extract relative costs in a layer based on pricing for layers where you do have claims.

Till All are one,

Epistemus

#2

Fairly synonymous. Umbrella is cuter. Excess of loss is more descriptive. Check policy language for actual function of the policy.

#3

Umbrella often attaches over more than one underlying line/policy. Excess is usually excess over one other policy. Umbrella typically DOES attach over other policies, often written by the same insurer. Excess can be excess of a self-insured retention. (Like a deductible, but much bigger.) Umbrella is usually a personal lines policy, or maybe small commercial. Excess is usually commercial, often large commercial.

At least, that’s how they’ve been different in my experience.

1 Like
#4

I’m thinking that “Excess” as used in the OP is referring to “Excess of the voluntary market”. We have a personal lines company that is part of the Excess & Surplus variety that is willing to write coastal homeowners risk that our main company won’t write.

Excess Lines in this context is the ability for the company to set rates/premiums w/o regulatory approval (might still be subject to regulatory review, though) and are usually for those risks that the voluntary market may not be willing to write (e.g., the coastal risks) or will charge a very high rate due to lack of expertise in underwriting the risks (the rate being a deterrent for the customer). I can see some smaller commercial risks that have enough “odd” exposures that would benefit from an Excess Line cover.

And the Excess in this case may not be just for liability coverage, but also property that the voluntary market will explicitly exclude.

Useful Links for a Property Casualty Actuary
#5

I actually meant Excess more similar to umbrella. Not surplus lines. But thanks for still checking in!

#6

I agree with the comment that Umbrella typically attaches over more than one policy where excess is typically following just one policy.

Typically for commercial policies the Umbrella sits over GL and Auto policies. In my experience many carriers do price the GL portion of the Umbrella as a factor of the underlying charged GL premium. This can have major flaws. Deductibles and SIRs varying by account significantly move the underlying charged premium . There may also be rate adequacy issues on the underlying. Carriers may attempt to avoid this by doing their own estimate of an adequate underlying premium using manual rates or loss rating an underlying layer.

For the auto portion of exposure I’d say many carriers perform a unit rating type approach accompanied by Increased Limits factors.

Excess layers can often be priced as a factor of underlying layers, with the same sorts of pitfalls mentioned for doing this for the Umbrella.

#7

There is also the case where the business needs to prove coverage for $5M of CGL, but their primary insurer will only provide $1M. The excess can cover that $4M xs $1M layer.

#8

(Yes this is a little older thread…but it’s slow here, and I just signed up for an account.)

One thing to be aware of is that the meaning of “excess” can/does vary depending on context. In my prior life doing pricing/product work for one particular class of business, it was not uncommon to look at an account that had (for example) a $9m excess liability policy atop a set of $1m primary policies that were themselves excess of a $500k SIR.

If the requested limits are high enough, it’s possible to have facultative reinsurance covering a certain amount excess an attachment point in the excess liability coverage layer…just to confuse matters further.

I tend to think of “umbrella policy” and “excess liability policy” as being almost interchangeable, except that “excess liability” in my experience is more likely to be written above some other carrier’s paper than umbrella, and sometimes (but not always) “excess liability” is really just shorthand for “follow-form excess liability”, where many (but not all) terms and conditions are inherited from the primary policies, as opposed to umbrella which is more likely to have its own, discrete conditions.

#9

Hi. I believe excess insurance provides additional limits over primary insurance for the same items covered by primary insurance, while umbrella does that plus provides coverage for some items where there is no primary insurance. In personal lines, my personal umbrella covers me for libel and slander (subject to a self-insured retention), even though my primary auto and homewoners do not.

A first start in commercial pricing is ISO increased limits factors, which use a curve fit.

Give some thought to which policy is paying the ALAE (primary or umbrella/excess)
in practice (not just what the policy says - talk to your claimspeople), and so which policy needs to load for it.

#10

Often synonymous.

The formal definition is that umbrella may not be strictly “follow form,” and may fill in gaps that the underlying policies do not provide any coverage for. It could “drop down” and cover small losses not covered by any underlying policy (in addition to excess coverage). Excess, on the other hand, may be used when the policy does not pick up any coverage gaps and is solely offering additional limits for the same coverage the policy beneath it (the “primary” policy) offers.

But these terms are used interchangeably quite often, and the terminology can vary between insurance companies.

Some carriers use “umbrella” to mean “lead umbrella” or the first excess layer. For larger commercial lines, many insureds will have several umbrella/excess policies (because one insurer may not be willing to offer the full amount of limit that the policyholder wants or needs), and I’ve seen “umbrella” meant to mean “the lowest attaching one.”

Most pricing literature probably uses the terms interchangeably and is usually referring to pricing high “layers” of insurance, and not to pricing the drop down coverage, unless it explicitly says it is.

Pricing umbrella and excess can be more of an art than science, but I’ve seen curve fitting approaches as well as the “traditional” applying ILFs, charging a % of primary, and arbitrary minimum premiums used to price layers with little to no claims activity.