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A special report released by A.M. Best Co. concludes that at the end of 2003, direct premium volume for the surplus lines industry increased by approximately 28 percent over the prior year, which followed an estimated 62 percent increase in 2002.
“The increased premium volume primarily reflects increased rates during the hard market (2001-2003) in addition to the tremendous migration of business from the standard market into the surplus lines market,” said Best.
It described the surplus lines, or non-admitted market as “made up of property/casualty companies that provide insurance unavailable to consumers in the standard or admitted market due to the unique characteristics and needs of the consumers. As a result, the surplus lines market is known for aiding insurance agents and brokers by providing coverage solutions for these policyholders in addition to developing new and creative types of coverage. Without the surplus lines market, businesses would have to forgo traditional insurance, self-insure their exposures or seek coverage outside the U.S. market.”
Best observed that compared with the 12 percent growth experienced by the P/C industry during 2003, the “surplus lines industry was a major beneficiary of the hard market.” It also found the premium growth to be in concert with historical trends, “which generally follow price firming in the standard market. During the onset of any hard market, growth in the surplus lines market generally has dwarfed premium growth in the overall property/casualty market. Throughout the normal evolution of the market cycles, premium growth within the surplus lines market has been fairly comparable with that of the overall industry.”
The report described the recent history of price firming within the surplus lines market and the P/C market as a whole as beginning in late 2000, “as the most recent soft market cycle finally was coming to an end. With price firming under way, the terrorist attacks of Sept. 11, 2001, helped to accelerate the hardening and exacerbate the reduced capacity that resulted in an influx of business to the surplus lines market. As anticipated, more disciplined underwriting and improved pricing conditions ushered in a period of enhanced profitability and more-robust operating margins.”
Best also said there are continuing opportunities for surplus lines insurers to further increase current pricing levels through higher average rates, “although there have been signs of rate softening toward the tail end of 2003 and through the first half of 2004. Lines of business currently experiencing pricing pressure are property, umbrella and excess coverage.”
The rating agency noted: “Larger insurers (as measured by direct premium) continue to dominate the surplus lines market. Size and flight-to-quality trends have benefited the larger, well-established surplus lines carriers, with the top 25 groups commanding an 85 percent share of the market. The two market leaders, by a wide margin, are American International Group — mainly through its Lexington Insurance Co. and American International Specialty Lines subsidiaries —accounting for 24.4 percent, and Lloyd’s, with 13.7 percent of the 2003 surplus lines direct written premium.”
Best said it “believes that successful surplus lines companies will focus on customized products and value-added services, such as valuable risk- and claim-management services, in today’s competitive environment. Furthermore, companies that have strong underwriting expertise and broad product offerings can leverage their distribution channels more effectively to find new growth opportunities. Proficient insurers also will leverage technology and employ data mining to target and retain their customers with superior service.”
BestWeek subscribers can download a printed copy of the full 52-page special report, “Excess and surplus 2004,” for $100 or a combination of the printed report and spreadsheet file for $250 from our Web site, http://www.bestweek.com.
Nonsubscribers can download a printed copy of this special report for $250 or a combination of the printed report and spreadsheet file for $500 from our Web site, http://www.bestweek.com. Call Customer Service for more information, (908) 439-2200, ext. 5742.