Minimum Premiums

One particular insurance department is giving me grief (and has done so for other insurers) about the minimum premiums charged on an umbrella policy. They only want us to have a single minimum premium for all policies, not to vary by risk type or limit of insurance. Their reasoning is that the minimum premium should only account for the fixed costs associated with issuing the policy. I saw one prominent insurer justify their varied minimum premiums on account of large fixed costs that I really couldn’t believe, but it looks like other insurers conceded this point. Meanwhile, in every other state minimum premiums of at least $500 per million up to 10M were approved without so much as a single pushback. (Have you guessed which state didn’t yet?)

Does that even work actuarially? I seem to recall from my exam 5 days that a rate is the expected value of all losses and expenses. So a minimum premium should not only consider the fixed costs associated with issuing a policy - the loss cost must be considered too.

Anyone else behind me before I tell a regulator that the guidance from their boss is actuarially unsound? Any insight anyone can share? Of course in the end what you have to do is follow the laws of the state. I suspect this minimum premium is not a law (or they would have cited it) but rather someone’s take on the situation.

I know nothing about P&C, but from what you’ve written there is no need to sell any policies at that premium, and no need to include any claim cost. E.g., admittedly you don’t have full underwriting info on me, but if you offered me an umbrella policy for losses up to $200 million with a deductible of $190 million, expected claim costs would be quite small. Admittedly I don’t see any value to having a minimum premium that would apply to that or other policies but would have no bearing on any policy which would ever be sold.

I disagree with this reasoning. I think a minimum premium should account for the expenses associated with issuing a policy. Those expenses aren’t always 100% fixed and aren’t always a straight line relative to size.

One could argue that certain lines require more underwriting, more expensive software/tools, have higher loss adjustment expenses, require a higher risk margin, etc. The list is endless.

I don’t see an actuarially sound reason to argue that if your umbrella minimum premium is $75, then all of your minimum premiums across all lines and risk types should also be $75. They’re not the same.

The main issue is that there was a minimum premium by layer, so if you didn’t have a lot of exposure you might end up paying $500+$450+$400 +$350+$350=$2,050 for $5M of coverage. Without that you might pay a percentage of your underlying liability premium multiplied by an increased limit factor to adjust for the layer being priced. For a farm with very little exposure it could be $200+$100+$75+$50+$50=$475 instead. Regardless of how little I charge for the underlying liability, I don’t think I want to charge that little for my umbrella premium. But some farms have a ton of exposure, dozens of vehicles. Others are just a lot of land without much going on at all.

Might be a silly idea, but if they are dug in on their policy on minimum premium could phasing this differently make a difference? Specifically, phrase it as the minimum rate per mil by layer.

Their logic makes sense. However, there are ways to poke holes at it.

Splits out underwriting expense by type. Not all policies are treated equal, some require more underwriting effort. Wherever possible, split out by location too in case there are geographical cost differences (from a fixed expense standpoint).

This gets tougher of course if your underwriters underwrite different LOB. But even there you can make assumptions. Say that an umbrella policy is much harder to underwrite than an auto policy, for example, and requires 5x the underwriters’ time.

And, dividing fixed expense by policy count will yield nonsensical results if your exposures span a wide range of values (from hundreds to millions), so you need to scale it with exposure to some extent or you’ll be charging like 10x the necessary premium for small policies.

The last time I had to support minimum premiums in a rate filing (for a specialty commercial product), it was essentially (minimum time required to process an application) Ă— (hourly cost of an appropriate underwriter, including wages, benefits, supervision, allocated rent, etc.) + (cost to issue and maintain a minimal policy), grossed up for variable expenses and profit load.

I would have attempted to incorporate some reflection of opportunity cost and cost of capacity utilization…but I had already been getting pushback from the DOI on our expense levels…and the expense of defending minimums (my time ain’t cheap) would have exceeded the incremental benefit of “what we wanted” vs “what the DOI would easily accept”.

I think in one or two difficult states, we ended up not having minimum rates, and instead had an equivalent underwriting guideline for minimum size account that we would look at.

Looking back at it, I wonder if I should have designed the rating algorithm for that product to start with a basic fixed cost (the minimum), and then built the exposure-influenced loss cost, etc. on top of that – essentially a rate like $500 + x% of exposure.

Nationwide in their filing suggested that for $6M and higher umbrella filings, they would expend $3,600+ of “account analysis cost”. That is 25 hours of underwriting/risk manager/sales hours x $130/hr + 2 hours of a leader’s time x $175/hr. PER YEAR, that is an ongoing cost, not something one-time. I talked with someone in my office to see what effort they put into underwriting a policy and it wasn’t anywhere in the ballpark.

I think I know how I’m going to solve the problem. Don’t know if the state will like it but I’ve got an idea.

most of the minimum premium/fixed expense filings I’ve worked on, certain assumptions are pulled straight from someone’s ass.


It’s stinky work, but some DOIs say we’ve got to do it.

(There are certain aspects of pricing/product work that I do not miss.)

I have my auto, HO, and umbrella with the same insurer. Having underwritten me for auto and HO, is my insurer really expending significant additional underwriting effort on my umbrella, in excess of policy issuance?

Does an insurer have a dedicated personal umbrella department that only does personal umbrella?

By the way, I think I get a multi-policy discount on the auto and HO, but not the umbrella.

There is a charge associated with coding the systems to monitor that the underlying policies remain in force with appropriate limits, operating those systems, auditing those systems, etc.

Also, the Acord application for personal umbrella does have some questions regarding potential risks outside the scope of standard auto and homeowners policies. There’s a cost associated with keeping a line underwriter on call in case the answer to those questions isn’t “no”, and I can imagine a savvy personal lines insurer having the automation to at least spot-check some umbrella applications against other data sources to test those answers. Reports ordered for those reasons persumably aren’t free.

As the person that’s done the reinsurance placement at multiple companies, when a compnay has an umbrella book, a large chunk of my time is dedicated to that line.

I don’t understand where you are going with this JT. No, the marginal cost of underwriting effort is likely quite small.

But of all people here, I expect that you understand that a primary actuary that expects the loss cost of an umbrella layer to be zero, then you have a example of a primary actuary that is about as wrong as he/she can be.

They will be right 99% of the time! (or whatever the umbrella frequency is)

There are some outlier circumstances where the loss cost of an umbrella layer could be pretty darned close to zero.

In a past life, I worked on an account that was a pool of commercial auto risks from agencies in a state where such agencies had rock-solid protection from liability from a combination of tort caps and sovereign immunity.

For reasons beyond the scope of this thread, the pool was priced as a pool, but was coded in the system as discrete policies for the different members of the pool.

There was one pool member that had a single private passenger type vehicle insured, and no out-of-state use was requested/reported.

One day, I got an email, with big bold letters in the subject line, flagged as important…AND a phone call to make sure I saw it. Apparently someone had run a query to smell-test for instances of underpriced excess liability, and noticed this one policy, $xm excess of $1m, written for considerably less than $100.

That lead to an “interesting” discussion on the nature of that business.

The loss cost for the excess liability on that (sub-)policy was very close to zero – the risk of an excess liability claim was strictly political or judicial, and we deemed that to be low. The pool had excess liability primarily for out-of-state exposure, as well as the minimal chance that caps/immunities would be thrown out in court, or by an act of the legislature.

The amount charged to the pool in aggregate was more substantial (although still low enough to give folks unfamiliar with the cap/immunity aspect of the risk indigestion)…but the allocation of that charge to individual pool members led to some weird-looking policy records.

You may certainly be correct. But the 1% of the time when they are wrong could lead to UMB product loss ratios being hundreds of percent higher than anticipated.

The actuary will be at a different company by then. It’s all good

Hi Deep,
Yes, I understand the expected loss to the primary umbrella is usually quite small.
The HO underwriter has already asked me about and has the opportunity to underwrite my liability for incidental businesses run from my home, swimming pools, trampolines, dangerous hobbies, dangerous pets, etc… So the umbrella underwriter (assuming HO and umbrella are with the same insurer) should have access to this. Is the umbrella underwriter underwriting me for additional exposures like libel and slander? I’m just not clear how much additional underwriting is being done.
I am assuming I am just an average insured here. I did have the opportunity during my career to audit a quota share of personal umbrella policies up to $50 million. These were celebrities and really wealthy people whose personal umbrella exposure was not something the HO underwriter worried about.

To quote Ellen Foley, “Stop Right There!”

I am trying to say the opposite.

If an actuary thinks the loss cost for an umbrella policy is quite small, they are probably underestimating the loss cost.

Excess trends are leveraged trends. Excess development is systematically heavier than primary development. Social Inflation hits higher layers harder than lower layers.

So someone says that their company has never seen an umbrella claim over 5M so they think the expected loss cost of 5 xs 5 umbrella should be free? 10 xs 10 should be loss cost free? No. No. No. No. That is drastically wrong. That’s what I am trying to say.