Demand Outpacing Supply in One of Best E&S Markets in 50 Years, Industry Veteran Says

By | September 17, 2021

According to William R. Berkley, there have only been “two, or possibly three opportunities that have looked like this” that he has witnessed during the course of his career—opportunities where “demand for [insurance] products outstripped the supply of reasoned and intelligent suppliers.”

Berkley was speaking at the Keefe, Bruyette & Woods Virtual Insurance Conference last Thursday,

The specialty insurance group’s chairman gave the historical perspective just before W. Robert Berkley, Jr., president and chief executive officer, reviewed some of the familiar drivers of the current firming market in commercial lines—the realities of a low interest rate environment, social inflation and financial inflation.

In contrast to other speakers opining on trends at the KBW event, and at virtual Reinsurance Rendez-Vous de Septembre events last week, the Berkleys stood out from the pack because they don’t yet see an end to hardening conditions in sight. Most others put 18 months or shorter timeframes on their favorable market forecasts and talked about decreasing levels of increasing prices.

“There are some fundamental drivers that, from our perspective, have led to the hardening in the market that we’re experiencing today, [and] we do not see them eroding. In fact, we see them continuing to persist, and in some cases strengthen, which will likely lead to further firming in parts of the overall marketplace.” Robert Berkley, Jr., W.R. Berkley Corp.
“We think this will continue for longer than usual because of the enormous amount of uncertainty in the economy and in the financial markets. When people are unsure, that increases the likelihood of this opportunity extending for a longer period of time,” said Chairman Berkley.

He said economic conditions have created an especially strong environment for the growth of E&S business volumes. Because there are many businesses that have dramatically slowed down or closed, “there are new businesses starting or giving new birth to the old businesses, which automatically means they go into the E&S marketplace,” he said, underscoring the opportunity for surplus lines carriers. “We think it is one of the best chances we have had to get great returns,” he said.

“Brokers only have a limited amount of time,” he added, suggesting that seasoned E&S markets like W.R. Berkley Corp. are best positioned to profit in the current market. “They have to find someone they have confidence in who can analyze, underwrite and place the business. It’s not just supply and demand, but it’s knowledgeable markets that can respond promptly to brokers—because the brokers don’t want to miss the opportunity,” he said.


CEO Rob Berkley noted that economic drivers, coupled with the fact that some insurers have been revisiting their appetites in a more disciplined manner, have been the catalysts for hard market conditions in commercial lines. Observing that “all product lines do not march together in perfect lockstep,” however, the younger Berkley said there are “micro-cycles,” meaning that different product lines are at different points of the hardening phase of the cycle.

“In truth, we have not made a nickel of property underwriting profits on a cumulative basis in the last five years.” Joseph Brandon, Alleghany Corp.

But the industry is cyclical, he stressed. “There are some fundamental drivers that, from our perspective, have led to the hardening in the market that we’re experiencing today, [and] we do not see them eroding. In fact, we see them continuing to persist, and in some cases strengthen, which will likely lead to further firming in parts of the overall marketplace.”

“In a cyclical industry, there are moments in time when you may need to shrink. There are also moments in time, like the one we’re in now, where when the opportunity presents itself, you want to maximize that opportunity and grow as much as you responsibly can,” he said.

Inflation Continues

The specialty carrier CEO debunked the idea that financial inflation is transitory—a term he said is popular in Washington, D.C. and with the media. “Financial inflation is real ….I’m not sure what the definition of transitory is, but [inflation] certainly has been going on for quarters, and there is nothing at this stage that leads us to believe this is not going to be a reality that we are going to grapple with for some period of time going forward,” he said.

“If you call decelerating rates—meaning I’m getting less of an absolute rate increase this year compared to last year—a bad thing, then I want to reshape that [view]. If you just chase absolute rate in a market that starts to go down, you end up getting a less-than-desirable portfolio.” Peter Zaffino, American International Group

“We need to appropriately take that into consideration in how we think about our loss costs—what that means for our trends going forward .…It’s one of the reasons that we as, an organization, were out pushing for rate, earlier than some of our peers, and it’s one of the reasons why we have not wanted to move loss picks down prematurely in spite of the rate increases because those rate increases are going to get gobbled up by certain types of inflation—financial or social ….

“Our assumption is Inflation is real. It rears its head in a variety of different ways. There is no question that, quite frankly, the costs of products, good, services today are by and large more today than they were yesterday. And we expect that trend will continue. And we need to obviously be responding to what does that mean for our claims costs and other costs and how we assess that in our pricing.

At a later KBW conference session, Peter Zaffino, president and CEO of AIG, talked about the transformation of AIG’s E&S unit Lexington Insurance, and what he views as AIG’s leadership in driving rate. At the same time, he cautioned KBW Analyst Meyer Shield against assuming that decelerating rate hikes—being reported by some market players now and projected by others on the near-term horizon—are necessarily a signal of eroding E&S profit margins. The key to continued underwriting profit is that rate jumps outpace loss cost inflation, he said.

The Commercial Lines Outlier—Workers Comp In addition to weighing in on opportunities in the E&S/specialty lines market segment where prices have been firming, executives speaking at last week’s KBW Virtual Insurance Conference offered views on the one standard commercial line that remains an outlier to the current hard market—workers compensation. “There is no headline. There isn’t anything new” to report, Christopher Swift, chair and CEO of The Hartford. “The line continues to perform well,” he said, noting that frequencies declined markedly during COVID but The Hartford remained conservative in its loss cost picks anyway. Pointing to the carrier’s expertise across small commercial, middle and even large risks with deductibles, which Swift believes gives The Hartford a data advantage, he reported that the company was able to manage to a good outcome event during a declining price environment over multiple years. “It’s still a highly profitable business for us. We have been able to manage to strong ROEs well in excess of our cost of capital. We have able to perform during a robust rate environment and when rate environments were challenged,” he said. “There is no breaking news here.” Still, Swift did refer twice to a benefit to workers comp and other employment-centric business lines—the tailwind of wage inflation. W.R. Berkley Corp. has been shrinking its book in recent years—and remains cautious. “From our perspective, it is possible that tempered benign frequency may have glossed over some other challenges around severity,” said Robert Berkley, Jr., president and CEO. “We, as organization, have been beating the severity drum for some period of time, [and] we’re concerned that others are not focused on that severity trend. We think it’s going to come back and bite them because they are busy celebrating the short-term benefit of [lower] frequency during COVID,” he said. Pointing to the impact wage inflation as “the one big wild card” for workers comp carriers, he conceded that “if all other [loss cost] assumptions…are spot on, and wage inflation is significantly above what people had anticipated,” that could be a benefit for the workers comp insurance industry. “We’ll have to see how wage inflation matches up with other components of the equation for loss costs,” he said. “That all having been said, from our perspective, the industry, overall is not paying enough attention to severity trend in the workers comp line.” In addition, he said, carriers need to keep a potential impact to loss frequency in the back of their minds—the tight labor market. “It is real challenge for employers to get talent. And as they are stretched on that from a staffing perspective, oftentimes, you get less well trained, less qualified people in roles where, as a result of that lack of training, they are more susceptible to injury,” he said, noting that another consequence of the tight labor market is more people working overtime—any possible contributor to rising claims frequency.

“If you call decelerating rates—meaning I’m getting less of an absolute rate increase this year compared to last year—a bad thing, then I want to reshape that [view]. I think it’s a good thing because we want to shape the portfolio we want. If you just chase absolute rate in a market that starts to go down, you end up getting a less-than-desirable portfolio….

“We want to make sure that we’re retaining clients, we’re getting rate above loss cost inflation, social inflation. We’re repositioning the book because we’re constantly pruning. And we’re also using [our] lead underwriting capabilities to drive outcomes.

“We weren’t relying on others to shape the rate environment that we wanted to drive for our portfolio” transformation, he said, noting that the repositioned AIG E&S book is now growing.

“We’re not a capacity player that just follows other leads …We want to shape the direction of terms and conditions. We want to shape the direction of how we’re underwriting. And I think that leadership has yielded rate increases, but equally repositioning of the underwriting portfolio,” Zaffino said.

Later, referring to AIG’s market position competing with a small field of large global lead underwriters rather than new capacity players entering the market to fill in “some of the commoditized layers,” Zaffino concluded: “I think the market we’re in is the market that needs to continue for a while. And we are comfortable that we will continue to lead in driving rate above loss cost, driving margin.”

E&S Property: Searching For Profit

At an earlier session, Joseph Brandon, president of Alleghany Corp., assessed the state of the market, viewed from the perspectives of Alleghany’s RSUI, a bigger player in the E&S property than casualty space, and CapSpecialty, a writer of professional liability, health care and specialty casualty.

Questioned by KBW Analyst Richard Cagney about the impact of the pandemic on specialty lines premium volumes, Brandon noted an influx of submissions. “RSUI and CapSpecialty have not missed a beat in the transition work from office to work from office. We did not see a noticeable dip in production trends,” he said. For RSUI, “the feedback has been very positive in terms of speed of response, quoting, being helpful thru a period of time when the wholesale market has received a substantial increase in submissions as standard markets have pulled back and re-underwritten certain risks.”

“Some of RSUI’s lines of business are in the 16 or 17th quarter of rate increase, obviously starting out much slower and ramping up to double-digits,” he said, reporting strong flows of business in management liability, professionally liability, umbrella and property.

“Now, some of the rate increases are off their peak but I think it would have been silly to assume they would go up at an increasing rate of speed forever. They’ve kind of rolled over but the rate increases that we’re getting, we believe are in excess of trend and we’re adding to the margin of the book of business.”

In the prerecorded session, which Brandon revealed actually took place within eight hours of landfall of Hurricane Ida, he focused in on the property line. “In truth, we have not made a nickel of property underwriting profits on a cumulative basis in the last five years. So, despite everybody talking about favorable property rates, we don’t have the underwriting profits that show it. That’s true at the reinsurance level, and that’s true at the E&S level.”

“Anybody who thinks rate increases the industry is getting aren’t justified, I think doesn’t have an appreciation of what the industry has gone through in the last five years in terms of losses. And I don’t think we’re the exception. I don’t think there’s any smart money in the property business these days. I think anybody who has been writing this business for five years has probably lost money, and at best, they made a little money but the returns on capital are unattractive for this risk. And it doesn’t matter if you’re alternative capital, traditional capital, E&S, London, U.S. ….It’s just been a very rough patch.

“We’re now coming up on the fifth year of frequency of $10-20 billion events around the world. Maybe it’s climate change. Maybe it’s just a tough patch. But the industry has got to charge more for these risks,” he said.

In fact, Fitch Ratings, in a recent report reviewing the state of the E&S market, noted that the E&S market recorded its second worst full-year underwriting result in the most recent decade in 2020, and its fifth consecutive year of underperformance compared to the overall P/C industry—highlighting the impact of heavy catastrophe losses.

“Property lines led the decline with a [year-over-year] unfavorable impact of 25 percentage points on the combined ratio. Higher loss ratios associated with inland marine, allied and fire lines were the most affected by the worsening results,” Fitch analysts reported in the rating agency’s U.S. Excess and Surplus Lines Market Review published in late August.

“Prior to 2020, heavy catastrophe losses caused by storms in 2017 and 2018 began the downward trend in E&S results relative to the overall industry….Property risks are highly sensitive to major catastrophe events and the 2020 direct combined ratio of 115 was the second highest of recent record. Property lines’ combined ratios of 144 and 113 in 2017 and 2018, comparably, were far outside of historical norms,” the report said.

Fitch expects strong rate increases to fuel an E&S profit recovery in 2021 from an overall combined ratio of 107 across the E&S business in 2020.

This is a slightly edited version of Susanne Sclafane’s article first published by

Topics Excess Surplus

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