Fitch Assesses Slowdown in E&S Market

September 29, 2016

Excess and surplus lines underwriters continued to outperform the U.S. property/casualty industry at large in terms of combined ratio in 2015, Fitch Ratings said in a new market review.

The report also cautions that premium growth in the E&S sector may be slowing.

Fitch noted that E&S insurers produced a U.S. direct combined ratio that was an average of eight percentage points better from 2011-0215 than the property/casualty industry at large.

Total E&S lines produced a 90.6 combined ratio in 2011, 100.4 in 2012, 84.4 in 2013, 85.4 in 2014 and 89 in 2015, according to the Fitch report. The overall U.S. P/C industry, by contrast, booked combined ratios of 103.4, 101.7, 94.2, 93.6 and 94.7, respectively, over that same 5-year period.

E&S results have been pretty stellar in part due to the sector’s consistent market attraction, Fitch argued, noting that it “provides an alternative to the standard market for hard to place, non-homogenous risks that often require substantive underwriting expertise.” It is also a relatively flexible market that is also less regulated than the standard admitted market in terms of policy rates and forms, Fitch said.

Like other sectors, though, E&S is seeing some slowdown. Direct premiums written for the U.S. E&S market grew from 2011-2015, capping with a 4 percent growth to $39 billion in 2015, Fitch said ($30 billion excluding Lloyd’s of London). But Fitch captured data for the 2016 first half that shows a 1 percent decline over the same period a year ago.

What is contributing to a slowdown? That would be price competition and some shifts of E&S type risks into admitted markets. Expectations are that sizeable market capacity will promote continued competition, making it hard for E&S lines price hikes to take hold.

“The E&S market became larger due to new entrants and retention of capital,” Fitch said in its report. “This increased capacity means more risks are being looked at, which dampens upward pricing momentum.”

Still, Fitch doesn’t anticipate too much change ahead, even though M&A activity in the E&S space changed some market share rankings.

“Recent consolidation is unlikely to fundamentally alter the market,” Fitch said, adding that more M&A could take place “given the attractive return on underwriting capital and limited investment yield.”

In the short term, Fitch said it expects moderate premium growth to be the reality for 2016, with some moderate deterioration in 2017 assuming coverage areas aren’t affected by “unusually severe catastrophic events.” Due to recent acquisitions that took place, Fitch also expects some underwriting teams to switch carriers. Other than that, (relative) stability will likely continue.

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