Insurance professionals in the surplus lines sector are busy. Busy adapting to a changing business world during COVID-19. Busy adapting to a changing property/casualty market where standard lines insurers are steadfastly shedding undesirable accounts. Busy adapting to a market that is increasingly digital. And busy multiplying their numbers of accounts and premium volume.
While many U.S. businesses continue to lag, the surplus lines insurance industry is experiencing significant growth.
The flow of business into the surplus lines channel is up 20% or more over last year, according to Timothy Turner, chairman and CEO of RT Specialty, Ryan Specialty Group’s wholesale brokerage operation.
That increase comes after a similar 20% jump in 2019, he said.
“It’s doubling. It’s a multiplier effect now,” Turner said.
Surplus lines premium reported to the U.S. surplus lines stamping offices in the first six months of 2020 neared $20 billion more than the first six months of 2019. Even while transaction counts decreased by 60,181, or 2.6% below mid-year transactions in 2019, premium growth continued despite the ongoing pandemic, social distancing guidelines and resulting economic conditions, the stamping offices reported in July.
“Business continues to flow into our space from the standard market,” said Bryan Sanders, president of Markel Specialty, and the current president of the Wholesale & Specialty Insurance Association (WSIA). “The market conditions that existed pre-COVID still exist, but COVID has layered another dynamic on top of that.”
That’s given the standard insurance marketplace more reason to exit more challenging classes of business. But pre-COVID conditions, low interest rates for carriers and social inflation still exist. “They haven’t gone away since COVID is upon us,” Sanders said.
Not every state reports their surplus lines premium to surplus lines stamping offices, but it’s estimated that about 62.7% of the total U.S. surplus lines premium volume is generated from the 15 states that do have offices. Of those 15 stamping offices, all reported premium increases for mid-year 2020 with eight states reporting double-digit percentage increases. While transaction counts were down overall, nine states reported increases in surplus lines transactions.
Texas was one of six states with an increase in premium and drop in transactions.
Greg Brandon, executive director of the Surplus Lines Stamping Office of Texas (SLTX), noted that while year-to-date 2020 reflects a reduction in the overall number of filings, Texas is seeing record setting premiums reported. “In fact, the second quarter of 2020 has resulted in three of the top four highest premium months in SLTX history,” Brandon said.
COVID’s Impact
The COVID-19 pandemic has been the biggest element of uncertainty for surplus lines, according to Sanders, who says the market pre-COVID was already firming, but the pandemic accelerated that trend.
The biggest challenge right now for E&S carriers is that “none of us know where we are in the cycle,” Sanders said. “All we know is that the pandemic started somewhere after the beginning [of that change], and we don’t know how close we are to the end.”
It’s in challenging times like these where the surplus lines market really shines.
“I think our industry and certainly Markel focuses on solving people’s problems,” he said. “That helps separate us as a market and to a large extent helps separate our end of the industry as well.”
Today’s E&S market is a stark change from a year ago when the property/casualty insurance prices increased in certain “pockets” of the market, said Joel Cavaness, president at Risk Placement Services. “It was spotty. Certain classes, certain types of business, certain industries were certainly seeing rate change.”
Today, Cavaness and others in the surplus lines industry say nearly all areas of the P/C market are seeing broad firming of rates, and tighter policy terms and conditions.
“There are few exceptions to that trend — workers’ comp and a few other smaller lines of business are not seeing the same rate increases,” he said. “But I would say broadly, across the board,” most of the market is seeing rates rise.
It’s not just price and tougher policy terms that are changing, he added. It’s also changes to buying habits of insureds.
“People pay little attention to buying habits but when prices change and go up dramatically, people have a tendency to rearrange their program to soften the impact of the overall price,” Cavaness said.
Changes in buyers’ habits are important, he noted. “What limits are they buying or, candidly, what deductibles are they willing to assume, or SIRs (self-insured retentions),” he said. “All the various levers that buyers can pull to soften a particular amount of a rate increase.” That means fewer coverage choices for commercial insureds, a significant change from just a year or two ago when insureds had more choice and more coverage.
The pandemic has hit the small business sector much harder than larger business classes in the surplus lines.
“Small businesses, which we do a lot of them as a large MGA (managing general agency), has seen more of an impact from COVID than the larger placements,” he said. One positive is that the small business side of the market isn’t yet seeing the same level of rate increases as larger and more complicated accounts, Cavaness added.
For large, more complex risks, in general, rate has outpaced exposure change, Cavaness said. “In property, even though there’s a pandemic, that doesn’t change the value of a particular piece of property or location or schedule,” Cavaness said.
However, the slowdown in small business has been significant. “Small business feeds off the economy, people starting new restaurants or new bars or new taverns, or whatever it might be,” he noted. “So, when you have a pandemic and businesses are shutting down, either temporarily or permanently, it does have an impact.”
In contrast, there has been an acceleration in the number of submissions into surplus lines for larger business classes during the second quarter. “You could clearly see indicators like submission flow and the national percentage of non-admitted business, pouring into the channel as standard companies were forced to put up reserves. That weakened their balance sheet, and it caused them to shed more unprofitable business at an accelerated pace,” he added.
While 2019 was difficult in some classes of business, 2020 has proven to be even more difficult, according to Neil Kessler, chief operating officer at CRC Insurance Services Inc.
He said the excess and surplus lines market saw a few carriers pushing to cut limits and raise prices for certain classes in 2019, but in 2020 that scenario has expanded with more and more carriers tightening limits, terms and conditions and increasing rates. The pandemic is adding further “downward pressure” on already challenging market conditions, he said.
“I think the rate trends and the limit cuts are moving faster than just the economic pressure,” he said. As traditional carriers say, ‘We’re not going to write this type of business or that type of class,’ the channel expands more. We’re definitely seeing the channel get bigger,” Kessler said.
James Drinkwater, president, Brokerage Division at AmWINS Group, agrees. “It’s been a very busy year, and a very challenging year but all things considered, the E&S market is remarkably positive,” he said. “Submissions are up dramatically.”
He said at AmWINS, submissions are up 12% to 15% and retention has improved. “I don’t see an end in sight certainly in the next 12 months,” Drinkwater said.
Momentum Continues
This momentum is likely to continue through the end of 2020, believes David Blades, senior financial analysts at AM Best, and author of the annual Best Market Segment report on the surplus lines industry.
“Although there’s a lot of unknowns still playing out from COVID-19 and how it will manifest itself in terms of insurance companies from an earnings perspective, you’re still seeing that the surplus lines market, and especially for really well-established surplus lines companies, the market is yielding a lot of opportunities,” Blades said.
Blades said 2019 saw a notable improvement for surplus lines companies over the previous year.
“When you look at 2017 and 2018, you saw a big impact on results from domestic catastrophes, whether it be wildfires or hurricanes, than you saw in the benign year of 2019,” the AM Best analyst said.
Along with more business moving into the E&S sector, results overall improved.
“The industry again saw E&S outperforming the overall P/C industry in terms of the loss and loss adjustment expense ratio,” Blades said. “We also saw from a combined ratio perspective, leveling off.”
Blades said those positive factors extending across the market through the end 2019 manifested in improvements to bottom line results from E&S carriers, both on the underwriting side and on the overall operating results’ side and through the second quarter 2020. We’re seeing that that momentum continue.”
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