A.M. Best E&S Review Reports 35 Percent Increase in Direct Premium Volume

October 8, 2002

The U.S. excess and surplus lines market reported a 35 percent increase in direct premium volume in 2001, according to the “Annual Review of the Excess & Surplus Lines Industry-September 2002,” released by A.M. Best Co.

The increase in direct premium volume reflects the hardening primary property/casualty market and the migration of business from the standard market to the surplus lines market as capacity in the standard market continues to shrink. This means that opportunities abound for surplus lines insurers to further increase premium volume at decidedly higher average rates. However, as business moves into the surplus lines market, loss cost inflation and higher reinsurance costs are expected to mitigate the benefit of the favorable rate increases.

Large surplus lines insurers continue to dominate the market, with the top 25 companies commanding 86 percent of the market. It is expected that many midsize surplus lines insurers will continue to align with large, diversified organizations that provide greater operating and financial flexibility.

Surplus lines insurers maintain high levels of financial strength and strong operating results supported by sound underwriting guidelines and effective risk-management techniques.

For instance, over the past five years, operating results for the surplus lines market, based on a composite of domestic professional surplus lines insurers, has outperformed the overall property/casualty industry, evidenced by the five-year average pretax operating return on net premium of 19.8 percent, compared with 4.8 percent for the property/casualty industry. However, underwriting results for the surplus lines market have weakened in recent years, a result of competitive pricing pressures and a reduction in the level of favorable loss-reserve development on prior accident years, which was driven by the extended soft market in the 1990s.

The median A.M. Best rating for the professional surplus lines composite remains at A (Excellent), vs. the industry’s median rating of A- (Excellent).

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