Super Storm Sandy last year hit the U.S. domestic professional and domestic specialty surplus lines companies hard. But even with the losses the industry experienced as a result of the havoc wreaked on coastal properties, businesses and infrastructure all along the Northeastern seaboard, the surplus lines market is on track to produce an underwriting profit in 2013, according to a recent A.M. Best report. In fact, increasing rates in specific lines, an improving economy and a boost in business rejected by the standard market is leading to increased revenue for Excess & Surplus Lines (E&S) carriers, while at the same time capital remains flush.A positive indicator for the E&S market was underscored at the 87th annual meeting of American Association of Managing General Agents (AAMGA) held in May, which experienced its second-highest attendance. And at the 2013 NAPSLO (National Association of Professional Surplus Lines Officers) annual conventional in San Diego last week, attendance was also at a record high (with nearly 3,800 registrants), another excellent barometer of the health of the surplus lines industry.
Moreover, in May we saw a move by Berkshire Hathaway in which the Nebraska-based insurer hired top executives from AIG in its effort to push into the E&S lines market. In a televised interview in May with Bloomberg Television, Berkshire Hathaway Chairman and CEO Warren Buffett said the former AIG executives will help Berkshire enter the commercial lines market "full bore" to complement its existing personal lines and reinsurance business. "They are very, very good insurance people, and we would like to get into the commercial insurance business very big time," Mr. Buffett said in the interview.
At ProgramBusiness.com, over the last year, we have also seen an increase in the number of wholesalers, MGAs and program administrators setting up Storefronts on our on-line platform to market their products to our agency members. We spoke with a few of our longtime Storefronts about the state of the E&S market, including Eric Arthur, Executive Vice President, Fulcrum Insurance Programs, a specialty insurance provider serving the Hospitality, Habitational and Commercial Real Estate and Casino industries; Stefan Burkey, CEO, Insurance Programs of America (IPOA), a developer of innovative programs including for Hotels, Senior Living Properties and National Properties; and Wayne Carter, President, Target Insurance Services, specialists in providing Errors & Omissions, Employment Practices Liability, and Directors & Officers coverage for a wide variety of professional classes.
"Depending on the class of business, we're definitely seeing more business going into the E&S market," said Eric Arthur of Fulcrum Insurance Programs. "For example, we're seeing a lot more habitational business being written on a surplus lines basis as a result of the admitted market scaling back in this area. This includes affordable and senior housing, as well as other garden apartment-style risks. Last year was very active in terms of weather events, particularly with Hurricane Sandy on the East Coast. This has caused the admitted market to request higher deductibles and rates, but implementing these changes all takes time with lengthy filing requirements, etc. In the meantime, the non-admitted market is able to respond more quickly in putting a product together as it doesn't have the same filing requirements. It's more flexible and creative and can fill in the voids and gaps in coverage availability, especially when it comes to wind and earthquake exposures. You can have a product on the street in no time."
Eric also discussed the shift that's taking place in General Liability. "Up until recently it was common for the marketplace to offer first-dollar GL coverage even on the largest accounts - with no deductible or retention of any kind. Many markets are now more frequently looking to include a GL retention in our business sectors (habitational and large hotels primarily). We offer a program targeting large resorts and habitational complexes for instance. It is supported by a non-admitted carrier, but we can still offer first-dollar coverage when many of our admitted competitors are looking for a retention. This is also helping to grow the surplus lines market in the areas we serve."
Stefan Burkey of IPOA agrees, as he is seeing increasingly more risks move from admitted to E&S paper. "Both deductibles and rates are trending upwards on the admitted side due to Hurricane Sandy and the high number of devastating tornadoes that hit the Midwest. As a result, we're seeing a flood of E&S opportunities on the Property side," said Stefan. "We're also seeing more E&S opportunities in General Liability. Many carriers went into certain classes, such as hotels and senior living, and wrote them as inexpensive BOPs. They got hit with claims and are now leaving the market, with accounts moving into the E&S world. What's more, there is plenty of capacity on the E&S side...in fact, there's more capacity than there is business, barring a catastrophic loss."
Stefan also cites that it's increasingly more challenging to remain in the admitted market for certain classes, such as heavy property, senior living, restaurants, and even condos and apartments that fall under the high-value property risk category.
Stefan is very optimistic about the growth opportunities in the surplus lines market. In fact, earlier this year, he and his partners formed London Insurance Brokers of America (LIBOA), designed to reach out to insurance agents with large books of business (outside of the three program classes they currently offer) to develop internal agency programs.
Wayne Carter of Target Insurance Services is also seeing business being written in the surplus market within his space. "One of the reasons we're seeing more activity on the surplus lines side for Professional Liability is that the admitted, standard markets are pushing rate increases, some of which are large, some moderate, while others do remain flat, but eventually all will move in the same upward direction. In some cases, you're also seeing carriers tightening their underwriting guidelines and being more selective in terms of their appetite, pushing some of the business that was written on an admitted basis into surplus lines. In fact, we're seeing this in our application flow. Whereas three years ago we were quoting 62% of Lawyers' Professional Liability in our admitted markets, we are now quoting less than 50%. Additionally, there is no lack of capacity within the surplus lines arena, especially in Professional Liability. And, there are more players on the E&S side not putting pressure to raise rates, which is very different from what is going on, in say, the property arena."
When speaking to Dr. Robert Hartwig of the Insurance Information Institute (I.I.I.), he sees the activity in E&S as a normal evolution of the market. "You have plenty of capacity, a competitive marketplace and carriers looking to grow, with some migration of exposures going into surplus lines. The non-admitted market provides more freedom for rates and the kind of flexibility needed in certain general underwriting environments in parts of the country, including those in more hazard-prone areas. It's not new but an ongoing trend."