Excess & Surplus Market Soars as Standard Carriers, Lloyd’s Drop Accounts

Demand for surplus lines insurance rose dramatically in 2018 and is continuing to expand this year, so much so that some in the sector are feeling a bit overwhelmed.

The excess and surplus lines sector is enjoying its largest growth rate – 11.2% – in years, thanks in great measure to standard carriers shedding business.

The growth has also been fueled by the strong economy, changing technology, and weather catastrophes and wildfires.

More and more business is migrating from the retail channel into the wholesale channel.

“There’s clearly a correction going on in the market,” Lou Levinson, CEO of Lexington Insurance, told Insurance Journal. “Everyone is looking at their portfolios and trying to adjust them to get in line with whatever their value proposition happens to be.”

Kristopher Bauer, president of WTIS, a privately held wholesale broker and part of JenCap Holdings, says the market is almost too much for underwriters to keep up with. He likens it to having to drink from a fire hose.

“There’s just so much coming at them that they can’t digest all of it,” he said.

“The underwriting community is just overwhelmed by submissions right now,” Bauer said.

According to Bauer and others, the shift in market conditions has been swift but not unexpected.

He said it’s a situation that requires patience.

New Business

New business into the U.S. E&S sector is mostly coming from standard lines companies nonrenewing accounts, according to Tim Turner, chairman and CEO, R-T Specialty, and others. It’s also coming from the Lloyd’s market, which shed some $5-$6 billion in business.

“In the first quarter this year we started to see things change – nonadmitted commercial lines business going into the E&S sector increased from 10% of market to 11%-12% by the start of the second quarter, and then up to 13% by the end of the second quarter,” Turner said.

The data he has reviewed suggests that at the end of the first half of 2019, nonadmitted commercial lines business has more than doubled, again.

“We believe the percentage of nonadmitted business in the E&S channel went up 30% or more during the first half of the year,” he said.

In his view, the Lloyd’s market and large standard commercial lines carriers getting rid of unprofitable accounts is driving the current trend.

“The biggest drivers are Lloyd’s shedding $6 billion worth of business that’s blowing back into the U.S. market. That was E&S business, but it was placed differently and now it’s getting placed over here,” Turner said. “And then AIG began shedding a lot of business on the admitted side, and that’s flowing into the nonadmitted marketplace.”

Other standard markets in the U.S. also began nonrenewing their most unprofitable business last year. That trend has since picked up in the first half of 2019, he added. It started with AIG but then other big standard market carriers like Travelers, CNA and The Hartford, began shedding unprofitable business. All of that “shedding and dumping” is going into the nonadmitted channel and there’s a lot of it, Turner said, estimating it has spiked 30% in the first six months.

Turner says the E&S market has been around 10% of the total P/C commercial market for the past eight to nine years, and it’s never been larger than 15% market share when it spiked in size after Sept. 11, 2001.

Today’s insurance market cycle is different, he said, and some believe that the E&S market’s size will definitely grow to 15% of the overall market and may get as high as 20%.

Turner said this year will likely increase the size of R-T Specialty’s book by about $3 billion. “We’ll go from $7 billion in premium to about $10 billion this year,” he said.

Dave Obenauer, CEO of CRC Group, says the market is “probably the most challenging market in at least 15 years,” but with a key difference from the past. “It’s not the hard market like we saw 20 years ago when everything peaked and went up quickly all at once.” Instead this cycle has been more of a gradual and sustained market.

Obenauer says terms and conditions have firmed up along with pricing. In his view, it’s a “new” hard market. “And certainly a lot more challenging environment than it has been in many years.”

Tom Jurgens, senior vice president, brokerage underwriting, Nationwide, believes the E&S market couldn’t be better than it is today. “Even in light of the catastrophic events that have happened in the last couple of years, the market couldn’t be stronger, and from my perspective it’s really in a good position to move forward,” he said.

Opportunity in Chaos

James Drinkwater, president of AmWINS Group Inc. and AmWINS Brokerage, describes today’s market as highly dynamic, somewhat chaotic, but hugely opportunistic.

Drinkwater says that organic growth for P&C transactional brokerage business and small commercial business has trended up more than 20% for his firm during the past year. AmWINS places about $16 billion in premium volume through five business segments.

Drinkwater sees the biggest opportunities coming from four sectors: real estate, some areas of construction, health care/long-term care, and transportation. “These classes of business have been the toughest four classes of the business that we’re seeing today,” he told Insurance Journal.

For R-T Specialty, the most significant increase in business has been in habitational real estate. “That’s the heaviest flow into the channel right now,” Turner said. Second to that has been construction; third, any catastrophe affected property business; fourth, certain types of professional liability including public D&O and nursing homes, and, finally, transportation.

“These are great times for wholesaling and for the E&S market,” Turner said. “We’re under a lot of pressure as an industry to respond effectively and to execute on behalf of retail agents and markets. That’s a great opportunity for us in this sector of the industry to perform at a high level.”

He’s confident wholesalers and surplus lines insurers will rise to the occasion.

Getting Analytical

The use of data and analytics as well as a focus on distribution efficiencies are contributing to the movement.

Jude DiBattista, senior vice president and head of Excess & Surplus Property & Casualty, at QBE North America, says data and analytics are helping to give underwriters a better view. The days of just using only historical exposure and losses to underwrite an account are gone.

“There’s a lot of good things happening in the E&S market today and I think technology is one of them,” DiBattista said. “Technology is going to help us underwrite and identify emerging issues and trends better.”

In the next 10 years, DiBattista says, the E&S sector will continue to see progress built on innovation. “Any new product that comes in, emerging issues or trends where the problem needs solving, comes to us,” he said.

The future E&S market, like the broader insurance market, will be built on data and analytics.

“It’s going to play a major part in assisting people to analyze risk and build different products. We’ll never lose that human touch that we have now in E&S — that gut feeling you have when you’re underwriting an account. But data and analytics will be an assistant to the underwriter to make better calculated decisions.”