The State of the Surplus Lines Market with Michael J. Hall

September 30, 2002

Insurance Journal publisher Mark Wells recently spoke with Michael J. Hall, chairman of M.J. Hall & Company Inc. and president of Golden Bear Insurance Company, both headquartered out of Stockton, Calif. Hall shared his thoughts on the current state of the surplus lines market and the state of the industry as a whole.

Wells: Michael, as a senior statesman of the surplus lines industry, we wanted to interview and ask you some questions about your career and the state of the industry right now. You’ve had what, 35 years?

Hall: Well, let’s see. I started my career with Stewart Smith & Co. in London in 1956 as an aviation man, actually. I cut my teeth in the aviation insurance industry, spent four years with Stewart Smith and was very fortunate to work under the great George Stewart, who’s long been deceased but who was a tremendous entrepreneur, and probably the forerunner of the surplus lines industry in the United States. He had numerous offices in the U.S. and Canada and really got a great handle on it. We had a sizeable book of American business. And then I spent four years with C.E. Heath & Co. in London, which was a great house, had a fine reputation. Of course the founder of that firm was the great Cuthbert Heath, who was the first person to write burglary insurance.

Wells: When did you start M.J. Hall?

Hall: I started M.J. Hall in 1973, here in Stockton, in the old Bank of America building. Through some very good mutual friends, [I] started to write a sizeable book of aviation products insurance. And we’re very fortunate. The market was quite tight at that time, there were only two major competitors, and we were able to put some excellent facilities together with prominent reinsurers and wrote a sizeable book of that business.

Wells: As I understand it, the insurance industry is much more highly thought of in the U.K. than it is in the United States as far as being included in the normal financial services circle, whereas perhaps it isn’t included here in the States.

Hall: I’m inclined to agree with you. I think in both Europe and the United States, I suppose people think that insurance is a necessary evil. But I think the European slant on that is that it is a highly reputable industry. The people are privileged to sit on boards of insurance companies. I think the insurance community is highly thought of in most towns, certainly in London, and the provincial cities, and so much so in Europe. One of the reasons may be that there is a downward-looking trend over here is the terrible situation of litigation. We are in a diabolical situation, and I am not certain in my own mind whether the present system can go on forever. There’s got to be some major tort reform. For example, in England, you sue me Mark, you lose, and you pay both ways. I would really hope that the Bush administration, particularly in the fact that they have no debt or duties to the plaintiff’s bar, would try and do something about it. Hopefully with the Republican Congress we can do something about it. It is totally out of control.

Wells: When did you start Golden Bear Insurance Company?

Hall: Actually, Golden Bear Insurance Company was incorporated in 1978, and we received our charter in 1981. The reason for forming it was because we had been writing a fair amount of catastrophe-type business, and the only way to get it placed in those days was to utilize the capacity of the professional reinsurers…. Having had a few good years in the brokerage business, I luckily, maybe wisely, managed to save some funds, and actually started Golden Bear Insurance Company with the minimum deposit and surplus requirements of $600,000. It took us two years to get the charter.

Wells: Let’s talk a little bit about the industry. The surplus lines is going through perhaps the hardest of hard markets right now. How many hard markets have you been through?

Hall: Oh my gosh. Three or four, I think…. The market was beginning to harden prior to 9/11. No question about that. People were losing millions of dollars in underwriting losses. They were also riding on the back of a very strong stock market, you know, dot com shares and such were going through the roof. The surplus was growing, and then all of a sudden that came to a crashing halt. So the market was hardening, and then 9/11 really blew the whole thing apart. I hear the press is reporting between 50 and 70 billion, maybe 100 billion, who knows by the time it’s all over with. And if you talk 100 billion, which may be excessive, you’re talking about a third of the total capital of the property and casualty in the world industry. And that includes the Gen Re’s, the Munich Re’s, and all the major companies. All of a sudden you lose a third of your capital, you’ve got to get it back pretty quickly, and this is the reason for the extremely hard market. It’s tragic when we get a soft market, because underwriting discipline goes out the window. Underwriters don’t ask any question, CEOs are telling people put the business on the books; don’t worry about loss ratios and that sort of thing… it will all work out magically. Well, of course it doesn’t.

Wells: How long do you think this market will go on? What will turn it around or soften it?

Hall: I think we’re certainly good for another year plus the end of this year, and 2003, and probably longer than that. The reinsurers can control certain classes of business from the standpoint of pricing, particularly when we get into catastrophe type classes of business, such as earthquake and windstorm, because nobody can write those classes without reinsurance protection….The problem is, as far as casualty goes, that the losses don’t come in the first year, the second year, the third year. It takes awhile for the losses to come through, either because of litigation, slowness in the courts, etc…. In addition to indemnity, we’re giving unlimited insurance defense.

Wells: How do retail agents explain this market to their clients? It’s a very difficult concept to get across to someone who’s not familiar with the insurance industry.

Hall: The only logical answer there, Mark, is that the retail agent has to tell his or her client that ‘Hey, you had it really good for the last fifteen years. Insurance has been dirt cheap….’ This is certainly an issue. It’s what the market will bear, and people have lost so much money, they want it back as soon as they can get it. It’s a matter of supply and demand, I guess.

Wells: I think the recent bankruptcy filing by Consolidated Freightways was an insurance issue—their inability to secure surety bonds to cover their self-insured workers’ comp program and their self-insured truck liability program at $35 million. They were unable to do that, and that really forced them into bankruptcy, and I think we’ll see a lot more of that. Do you agree with that?

Hall: I do. That’s the sort of thing that’s going to cause bankruptcies, there’s no question about that. I also know that the self-insured excess workers’ compensation market, for example, is getting very tight because insurers are concerned about the ability of insurers to pay the primary losses.

Wells: Let’s get more specific about the surplus lines business and how that relates to the general public, and the importance of the surplus lines business to the business community throughout the West and the United States. The ability to have freedom of rate and form for non-admitted carriers.

Hall: That’s a great question. I think we have to start off by stating that the surplus lines industry in the United States is unique. It does not exist, to my knowledge, with the possible exception of Canada, in any other country in the world. I can remember speaking to Japanese insurers regarding high risks, and their answer is ‘We would never write a hazardous risk, because we don’t want to lose face. And if we don’t want to take it, we’ll buy it back with reinsurance.’ The same thing was applicable in Europe. Your Commercial Unions, your AXAs, your Royals, will write tough risks. They may buy reinsurance for them, but they’re written. So the surplus line market in the United States is completely unique. Having said that, we must remember, the majority of the major carriers in this country have surplus lines divisions. And of course, these are written on a non-admitted basis, with different companies, and they’ve got freedom of rate and reform. Frankly, I’d like to see the whole thing removed so that companies can charge what they want and let competition drive the price.

Wells: So you feel very strongly that there should be no prior approval of rates and no prior approval of policy forms.

Hall: I think probably they should be maintained on the personal lines situation… but as far as commercial lines goes, I think it’s archaic. I think the insurance companies should be allowed to charge what they like, as long as they don’t discriminate.

Wells: So, you’re for an open market where the marketplace is set up to attract the most competitors and let competition set the rate.

Hall: Absolutely, as it does in any other business in this country. It’s the same as the banks, it’s the same as the supermarkets. People will go to an insurance company they like, and I think it’s very important that an insurance company keeps its reputation, keeps its integrity, pays its claims promptly, and by doing those sort of things, loyalty comes back into the marketplace.

Wells: Do you think there’s much probability of that?

Hall: That’s a very good question. I don’t see it on the horizon, but it would certainly make it a lot simpler for all of us. The only comment I would like to make too, regarding the state of the industry as such, is in regard to windstorm losses. We have been hurricane-free, not storm-free or tornado-free, but hurricane-free, for I think almost three years, as I recall, and we’re only halfway through the hurricane season this year. We will get another hurricane, that’s a fact of life. We don’t know whether it will be this year or next year. A dramatic hurricane, such as Hurricane Andrew that occurred in Florida, could be devastating to the insurance marketplace. And the difficulty you have with some of these states is that the politicians get involved, particularly in Florida, mandating pools, and forcing people to write business they’re not comfortable writing. So if we can keep the politicians out of our business, I think it’d be a much healthier business, both for the insurance companies and for the clients.

Wells: Speaking of that, we had some recent horrendous floods in Europe. How does that affect the U.S. insurance market?

Hall: Well Mark, it affects the U.S. market, because whether it’s a flood in Europe or an earthquake in Japan or a hurricane in Florida, the CAT market for all of these risks is the same market. We’re talking about the General Re’s, the Munich Re’s, the Swiss Re’s, and the Employers Re’s. These people are all global players, they have international offices, and they write these CAT covers all over the world. So, if we have a major earthquake again in Japan, it goes in the same pot as if we had a major earthquake in California.

Wells: The industry really is a global industry, especially on the reinsurance side. Also, Lloyd’s of London plays a big factor in the U.S. market. I think the U.S. is the single largest customer for Lloyd’s of London. Can you comment a little bit about some of the proposed reforms of Lloyd’s. They’re going through a lot of changes right now.

Hall: Absolutely, particularly on the reinsurance side…. [In regards to Lloyd’s], the most important, of course, is the unlimited liability of Lloyd’s members has now ceased, which makes a huge difference, and obviously makes actually becoming a Lloyd’s member more attractive. Again, Lloyd’s is a very different animal than it was, for example, when I worked there back in the ’50s. Every syndicate was independent, all the names were individual, and of course it reached the ceiling of some 35,000 some 15, 20 years back. Now you’ve got a totally different situation where, by far, the majority of the capital in Lloyd’s is corporate. I don’t fully understand why these corporate vehicles, actually many of them operate at Lloyd’s. Number one, it’s expensive to have people over there; number two, the rent is very expensive. And particularly if they’re writing American business, why not just write it here? There are many American companies writing American business out of London, and to me, I think a lot gets lost in the shuffle… between business coming from brokers, agents to brokers to surplus lines brokers to London to underwriters and back again. I think for example, if Golden Bear Insurance Company wanted to write business in England, we would have an office there. I don’t believe you can do business long distance. You need to have local people, you need to have adjusters that you can trust, you’ve got to be able to inspect risks, and you’ve got to get the full flavor of what’s going on in the marketplace.

To hear the Hall interview in its entirety, visit and click on Interviews.

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