Surplus Lines Industry Discusses Life After the Storm

NAPSLO 2005 ANNUAL CONVENTION:

With more than 3,200 people in attendance, the National Association of Professional Surplus Lines Offices’ annual convention convened in San Francisco, Calif., last month to address the “changing tides” in today’s insurance industry. While the conference’s theme focused on the changing regulatory environment of the industry, the recent aftermath left by Hurricane Katrina may have set a new stage for yet another change, according to many conference attendees.

The post-Katrina industry will be “different,” said Mark Smith, division president of AmWINS Brokerage. “It will certainly impact the property market. They are going to need more capacity, more layers and who do you go to when you are looking for that relief valve, that safety valve-it’s the wholesale market place.” Smith said now is the time when the surplus lines market fulfils the need it is meant to fulfill. “We are going to come to the industry’s aid to provide that capacity.”

State of the market, pre-Katrina

Despite rising loss costs, low investment yields, and in most cases going forward, price decreases as the market softens, the surplus lines industry results are expected to remain strong, according A.M. Best Company’s annual review of the E&S industry. Best released its 12th annual study at the NAPSLO convention and based the report on 2004’s financial information prior to Hurricane Katrina.

Best reported that in 2004, after growing significantly for three consecutive calendar years, direct premium volume for the surplus lines industry remained relatively flat. Overall direct premiums written by the industry were $33 billion, less than a 1 percent increase over 2003, and lower than the increases of the previous two years.

Overall, Best reported the surplus lines market represented 14 percent of the commercial lines industry in 2004, compared to 6 percent in 1994 and nearly 4 percent in 1984. Over the past 20 years, the U.S. property/casualty industry has grown by approximately 375 percent while the surplus lines industry has grown by nearly 1,400 percent, going from $2.4 billion in 1984 to $33 billion in 2004.

Surplus lines carriers on average retained a greater percentage of financial strength ratings in the “secure” category compared with the total P/C industry, Best reported. Underwriting results also outperformed the overall P/C market in the surplus lines sector by more than 5 percentage points, with a combined ratio of 92.7, compared to 98.1 for the total industry.

State of the market, post-Katrina

No one knows exactly what the property/casualty industry will look like after the total impact of Hurricane Katrina has been accounted for. The cost to the U.S. property/casualty insurance industry hit an estimated $34.4 billion in insured property losses, according to preliminary estimates by ISO’s Property Claim Services unit. The event will be the costliest event in the history of the insurance industry, surpassing 9/11 and Hurricane Andrew.

“If 9/11 was a 10, is this [event] about an eight or a 12? We just got out of a meeting and the gentleman’s response was ‘This is a 15,'” said Steve DeCarlo, president and CEO of American Wholesale Insurance Group. “Katrina is a major change in the marketplace and wholesalers tend to do very well in a changing market. It’s an exciting time for American Wholesale and the industry in general.”

Hurricane Katrina will be a defining event for the overall industry, said Tony Markel, chairman, CEO and president of the Markel Corp. “The shear size of Katrina sets it apart from anything we’ve ever experienced,” Markel said. “It will have some effect in that some companies are going to be financially challenged.”

But Markel believes that the industry will be able to manage Katrina losses and any other natural disaster in the future without public assistance, such as a national catastrophe pool. “At the end of the day the industry will be able to step up and meet the challenge; the capacity will be there,” he said. But not without adequate pricing and sound underwriting, he added. “The capacity will be there as long as you’re willing to pay the tariff.”

Paul Springman, executive vice president of Markel Corp., said the industry overall has been a very resilient business and will continue to be so even after Katrina.

“If you look at what has transpired over the last four years, the industry either through underwriting profits, investment returns or just capital raising, added about $100 billion to surplus in the property/casualty industry,” he said. “When you think about Katrina, the industry may loose 10 to15 percent of that surplus in this one event, but those that have the ability to raise capital that need it will be successful, and those that don’t have to raise capital will be successful sooner.” Nevertheless, Springman said there probably will be some fallout for a few weaker carriers hit hard by Katrina losses.

Topics Windstorm Excess Surplus Property Hurricane Market Property Casualty