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There’s Opportunity in Unusual and Emerging Risks, Sullivan Tells Carriers
The current economic and business wave presents property/casualty insurance carriers with opportunities to expand or differentiate themselves by getting into the specialty lines business.
There is no shortage of unusual and emerging risks that specialty, or surplus lines, can accommodate, according to Gerald Sullivan, a long-time surplus lines industry leader.
Speaking before executives at the Property Casualty Insurers’ Super Regional Conference in Wisconsin, Sullivan urged standard carriers to consider getting into the surplus lines business if they are not already and, if they are already writing some surplus lines accounts, to consider writing more.
“It’s a competitive world out there, and it’s going to stay a competitive world. So you’ve got to do something a little bit different if you’re going to get ahead of the next guy. And that’s what a lot of these new things are all about,” he told the executives.
“This is where there is opportunity, but it’s going to require some change,” he stressed.
The Super Regional Conference was sponsored by Wells Media Group, publisher of Insurance Journal, Carrier Management and Claims Journal, and Ohio-based actuarial consulting firm Demotech.
Sullivan is a surplus lines veteran, having started the Los Angeles-based Sullivan Group in 1981 and growing the firm into a major presence in the surplus lines industry. It is one of the affiliates of Gerald J. Sullivan & Associates that was bought in April by Worldwide Facilities.
Nonuniform Risks
While standard carriers are good at writing uniform risks, Sullivan stressed that not all risks are uniform — even when they appear to be, and not all risks are equal in the information known about them.
He gave the example of three manufacturing plants that look the same. They’re all located in the Midwest. They all manufacture the same product. They all have about the same number of employees, and they all have about the same amount of revenue.
They look very much like uniform risks. But, Sullivan added, a specialist or surplus lines underwriter looking at individual risks would discover the following: Factory one gets its parts from the next state. Factory two gets its parts from Thailand, which several years ago suffered a massive flood. And the third risk has a terrible loss record.
“The fact is, they are not uniform risks. If you were using the standard rate given for what they’re manufacturing and their size, and so forth and so on, you would have problems with at least a couple of those risks, because they are nonuniform and this is really the heart of specialty lines,” Sullivan said.
Sullivan noted that beyond serving nonuniform risks that may appear at first to be uniform, the specialty lines industry can also supply coverages for a myriad of new and emerging risks including mandatory evacuations, the Internet of Things, supply chains, 3D printing, workplace violence, tax audits and more — risks that the admitted market can’t handle but specialty, or surplus, lines carriers can because of their extra freedom to determine policy forms and rates.
Heart of Surplus
“The heart of effective nonuniform risk underwriting or specialty lines is the freedom of rate and form,” Sullivan said. “If you have a risk that’s displaying something unusual or something different, and very frequently if your client is starting a new enterprise, the traditional carriers don’t like that because there’s no track record, there’s no background, they often will end up in the surplus line side of things.”
Like a therapist, he told the insurance managers, that in order to succeed in a new venture they have to want to change.
“[I]n order to succeed with either of these new products that I’ve been talking about for specialty lines, you’ve got to realize that changes are going to be required. You need to recognize the opportunity, embrace these changes, and do what is good for your customers, and that’s good for your bottom line ultimately,” he said.
He said that the concept of “doing what is good for the customer” is often overlooked but it is the best place for a carrier to begin its journey into specialty lines. A carrier should ask if its customers would be better served if it wrote surplus lines.
To answer that question requires getting past several common excuses Sullivan said he has heard for not doing something new.
The first is the contention that a carrier can’t force customers to pay more premium.
“The fact is you don’t have to force your customers to do anything. You simply show them a new product, a new idea, a new concept, and let them make the decision. So that’s really not a valid excuse,” he said.
The second excuse is that the carrier will have to make state regulatory filings. “You have to make filings every day, you have ways of doing that, otherwise you wouldn’t be in the business that you’re in. So that’s really not a valid excuse. But you’d be amazed how often it gets put up,” he said.
The third excuse is that a carrier’s agents don’t want to sell new coverages. “I hear that all the time, and you know what? They’re right,” he said, adding that probably 70 percent of agents are doing well and not interested in doing something new or extra. “But that’s 70 percent. What you need to focus on is the 30 percent. These are the hungry ones, and they’re the ones that are out there to run with it.”
Last but not least is the excuse that a change like this requires the IT department to be onboard and that’s too complex and lengthy of a process. “Well, so be it. All the products that you’re putting out, if you’ve got IT heavily involved and you really should, you already go through this all the time,” he said. “It may take a little bit of time to get into the queue and get the thing moving forward, but that’s no excuse to not get the process started.”
Each nonadmitted risk must be underwritten individually. Thus, carriers need people who are trained and geared to do that. Responding to a comment from an attendee in the audience, Sullivan acknowledged finding and training new talent is a challenge.
“There are programs out there that help newbies coming into the business. And your point about, we need to develop new talent is absolutely correct. Unfortunately, we have too many people of my age in this business. What we need to do is to be bringing new people in,” the Californian said.
Sullivan shared his experience with several programs developed to bring young people into the insurance business. “The thing that I find most interesting is that the thing that seems to turn off a lot of them is they kind of view it as, ‘Oh well, it’s just more homeowners, it’s just more automobile, or it’s just more life insurance.’ That strikes them as really dull and boring,” he said “But when you start talking to them about some of these new products, some of the specialty lines, some of the more interesting, difficult problems that we deal with, that really does get the youngsters attention, and they say, ‘I want to know more about that, I want to be more involved.’ That’s where the training has got to come from.”
While still small compared to overall commercial P/C business, the surplus lines segment has been growing year after year and now accounts for about 14 percent of P/C commercial lines business. By 2016, the surplus lines segment reported about $41 billion in premium, according to A.M. Best composite figures. Two- thirds of that was written by U.S. domestic surplus lines writers, with a Lloyd’s being the next biggest market.
For the first half of 2018, surplus lines insurance premium recorded by the 15 managing service offices increased 9.4 percent, the Surplus Lines Stamping Office of Texas (SLTX) reported. Total premium reached $15.7 billion, approximately $1.4 billion more than was recorded in 2017, according to the mid-year analysis by SLTX. These same 15 surplus lines service offices reported $28.1 billion in premium for all of 2017, an increase of 6.4 percent over 2016.
Due to its nature as a safety valve for the risks a changing admitted market won’t handle, there is some volatility in results. But thanks in great measure to the freedom of rates and forms they enjoy, surplus lines carriers’ loss ratios are generally better than the admitted markets’ and the segment’s solvency record is good.
Sullivan shared his list of emerging risks that specialty lines can address that included IoT, sharing economy, supply chain, mandatory evacuation, cyber, climate risk, tax audit risk, event cancellation, workplace violence, autonomous vehicles, marijuana, medical catastrophe, epidemic outbreak, 3D printing and parametric coverages.
“We as an industry, despite what some people will say, have both the ability and the opportunity to deal with a whole lot of these new risks,” Sullivan said.
The Surplus Line Association of California in July honored Sullivan for his long career in insurance with its distinguished Lifetime Leadership award. “It’s very infrequently given and only when there’s a remarkable reason to give it,” Ben McKay, executive director of the SLA-Cal, said of the award.