SPECIAL REPORT: Back to Earth with Surplus Lines

NARRATOR: The year is 2010 and Dr. Lois Kwoat, Dr. Heywood Jawrithis and their know-it-all computer companion, Pal 2010, have returned to planet Earth from Recover Space Station a million miles away. They are on a new mission.

Kwoat: We all agree that we are no longer interested in wearing funny suits or putting our lives on the line. We need to find a career where we can have fun, dress is normal business attire and make money without getting killed.

Jawrithis: I’m all for that. I like being around high-risk adventures as much as the next space cadet but I no longer feel the need to be at the center of the danger. From now on, I’m happy to operate from the outside looking in, or inside looking out, whichever is safer.

Pal: Well, Lois and Heywood, given those parameters, our best option is to investigate the surplus lines insurance industry. The best surplus lines professionals go where others fear to tread without actually placing themselves in jeopardy. They can pull profit out of a black hole. Plus they throw the best parties.

NARRATOR: Then the surplus lines industry is the way to go, the trio agreed. From the safety of their Hyundai Hummer all-terrain vehicle, they set out to interview industry experts and uncover the ways of the surplus lines insurance industry in the year 2010. First touching down in Kansas City, Mo., home of the National Association of Professional Surplus Lines Offices, they toured East, West, South and North. Here’s a summary of their report in the year 2010.

2010: SURPLUS LINES EXECUTIVE SUMMARY

CARRIERS

The carrier population remains stable. Over the past five years there have been a few mergers, a few new entries and a few failures. But there has been no dramatic change in the number of carriers. A few new entries have sprouted, similar to four and five years ago when now-entrenched James River, Aspen and Wellington were started.

PRICING

A hard market challenges surplus lines. Annual rate of surplus lines premium growth is in the single digits. Observers think standard prices could start softening in the year ahead.

FINANCIALS

Continued low interest rates and inflation along with intensified rating agency scrutiny have kept all insurers, including surplus lines writers, focused on profitability. The surplus lines industry continues to produce an underwriting profit and a respectable combined ratio of around 93.

MARKET SHARE

The flight to size and quality evident in the last decade has kept up with premium growth. The top 25 insurer groups still control 75 to 80 percent of the surplus market. Foreign insurers maintain a healthy U.S. surplus lines market share, although domestic carriers have gained slightly.

DISTRIBUTION

The effects of the wholesaler spin-offs by the big brokerage houses five years ago continue to be felt. Broker mergers have slowed but growth of national and regional wholesalers continues. Smaller local wholesalers and MGAs report being squeezed by the carriers, regionals and online brokers.