Direct premium volume for the surplus lines insurance market remained relatively flat in 2005 as it did in 2004, after growing significantly during the three prior calendar years.
The significant growth had been a consequence of the hardening market conditions from 2001 into 2004, according to A.M. Best Co.’s Surplus Lines Market 2006 report.
The softening trend in the overall insurance industry, as noted in the report, began in the latter part of 2004. It impacted the growth of the surplus lines market overall, although it did not have a marked impact on smaller and, in some cases, middle-market surplus lines risks in terms of average rates and pricing.
The current market softening trend does not extend to coastal property risks. The extremely active windstorm season during the second half of 2005 spawned several hurricanes, primarily hurricanes Katrina, Rita and Wilma, that caused significant property damage throughout the southern part of the United States. These storms affected both primary and reinsurance companies and isolated the coastal property segment of the insurance market as not reflecting the overall move toward a softer market. The magnitude of these storm losses has led directly to substantially diminished capacity being offered to primary insurers by reinsurers and has contributed to the greater focus that now is placed on aggregate exposure management and enterprise wide risk management.
Larger insurers (as measured by direct premium) continue to dominate the surplus lines market. Size and flight-to-quality trends benefited the larger, well-established surplus lines carriers during the hard market, with the top 25 groups commanding an 82.5% share of the market in 2005.
Despite rising loss costs, modest investment yields and decreasing rates on most lines of business, A.M. Best expects surplus lines industry results to remain strong. Solid profit opportunities remain for the well-established and start-up companies that have implemented effective strategies to target small and middle-market risks that are less price sensitive than the large, high-premium policies.
The five main sections of the report–State of the Market, Financial Condition, Best’s Ratings and Impairment Trends, Regulatory Landscape and Distribution–have been updated or revised to reflect current industry and market trends.
The surplus lines market is made up of property/casualty insurers 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 types of coverage.
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