Once upon a time, the Surplus Lines industry was regarded as the "safety valve" of the Property & Casualty industry — the avenue for risks that were simply too complex, too unusual, or in some cases, just not desirable enough for the mainstream market to take on.
How times have changed. Over the last 25 years, E&S has gained an increasing share of the P&C marketplace; the segment has grown by more than 35% since 2011, despite continued downward pressure on rates. Increasing demand for solutions to complex risks and new product innovation have been and continue to be key drivers.
Empowered by freedom of rate and form, the E&S market has become the greatest source of organic growth in the P&C space, where solutions are crafted for exposures both brand-new and those evolving within existing lines of business that now, thanks to cyber threats, will never again be the same. Where there are unusual threats to business, Surplus Lines can identify and seize opportunity.
These days, that opportunity never seems to stop knocking.
"Surplus Lines is no longer that ‘market of last resort,’ it's the nexus of innovation," says Matt Power, president, national branch and head of wholesale broker engagement at Lexington Insurance Co., AIG's excess & surplus division.
“Specialty distributors and specialty carriers have become a larger and more important part of the commercial insurance ecosystem,” adds Corinne Jones, CPCU, executive vice president of operations for AmWINS Access Insurance Services.
In July, Jones was elected president of the Wholesale & Specialty Insurance Association (WSIA), the newly minted organization that emerged from the union between the National Association of Professional Surplus Lines Offices (NAPSLO) and the American Association of Managing General Agents (AAMGA), the two largest national organizations of Surplus Lines professionals in the U.S.
WSIA's first official event, the Annual Marketplace, takes place Sept. 10-13 at the Manchester Grand Hyatt and Marriott Marquis in San Diego. This yearly gathering of leading E&S professionals (formerly known as NAPSLO's Annual Convention) is known to those who attend as “the place where deals get done,” and this year will be no different.
Those who work in E&S lines will tell you that staying competitive in this sector is by no means easy. The market continues to soften, especially in property, says Jones.
"Nevertheless, we do see some isolated areas of hardening, specifically in the trucking business and in certain geographical areas, such as New York construction," she continues. "There's been a decent amount of dislocation in these segments, which has led to increasing rates. Overall, we have not seen the market-pricing increases or availability issues that we used to as a result of catastrophes in the U.S. or globally."
Joel Cavaness, president of Risk Placement Services Inc. in Rolling Meadows, Ill., maintains that while the market isn't hypercompetitive, it is certainly competitive, with multiple quotes easily obtainable. As a result, however, that creates a tighter window in which to place that business before your competition does. "The only place that pays is first place," he says.
Certain transportation accounts, says Cavaness, can be limited, such as a start-up for a trucking account, and obtaining Builder's Risk cover on easily combustible habitational-frame products can be challenging.
In the Southeast, “the only market where we are seeing hard-market pricing is in Commercial Auto coverage and the trucking industry,” says Patrick Albrecht, senior vice president, Associated Insurance Administrators Inc. in Montgomery, Ala. He adds that Commercial Property, General Liability, and Workers’ Comp are all very competitive and mostly reflect soft pricing.
“While the rates do not appear to be declining, I don't foresee any steady increases without multiple hurricanes or changes in law or regulation” that could spur pricing, adds Albrecht. “I doubt we will ever see across-the-board hard-market pricing, but there could be hard-market pricing that develops in specific niches, lines of business, territory or some combination thereof.”
Related: Surplus lines in 2017
Capacity vs. creativity
Several E&S executives cite the amount of excess capacity in the P&C market as putting pressure on growth. Capacity is in great supply — perhaps too great, some say.
"In a business environment in which insurance is viewed as a commodity product, you have to be efficient at what you do," says Ed Levy, vice president, Western Region for Risk Placement Services Inc. in Scottsdale, Ariz. "Sustainability comes in two places: product development, in which you have to be intuitive and know what things you can create and then sell — it's not a commodity — and expertise, specialization and knowledge."
"Our job, in my mind, is to provide answers to the insured, first," Levy continues. "Competition is good in that it creates an opportunity for insurers who can get better deals, but it can also be somewhat problematic when there's a ton of capacity — and when we teach our customers that they can buy things cheaper, they pay less attention to what they’re buying."
Levy points to the Environmental and Energy sectors as areas that will present continued opportunity and growth, and says the on-demand economy (“With Uber, for example, you have markets who have figured out how to write the drivers,” he notes) will be served particularly well by the E&S market as it continues to evolve.
New risks like driverless vehicles and other technological breakthroughs will also surely find a home in the specialty market, he adds. “The innovators are always going to have to find insurance, and that's not going to be through the standard market.”
Power is likewise enthusiastic when discussing new types of risk such as those posed by nanotech, genomics and micro segments such as robotics, with its myriad manufacturing and service applications. He sees new technologies coming on board in hospitality, health care and construction.
“The construction industry is one that will be most impacted by tech advancement,” says Power, pointing to how construction workers can now be outfitted with wearables that can show a site manager that an individual worker is lifting incorrectly; laser cameras that create a 3-D image of a worksite that can be overlaid on the original blueprints to see if the job was done to spec, should any conflicts arise; and affordable sensor devices that will record any change in atmospheric conditions — for example, a severe temperature shift at a luxury condo where pipes could burst, potentially preventing tens of millions of dollars in losses.
The 'cyber effect'
While originating in the specialty market, Cyber Liability coverage is now a product of which every primary-market carrier wants a slice. Again, however, E&S is the sector in which the niches in this line — and the opportunities they offer — are being recognized.
Cavaness says Risk Placement Services has written more than 18,000 cyber-related policies this year alone, a huge revenue driver. It's a smart buy for clients, as the legal costs that can be incurred by a data breach are huge — to say nothing of the notification costs and multiple other expenses for which first-party protection can be had at a competitive price.
Those clients include schools, hospitals, retailers and a variety of other organizations with a great deal of personal data to protect, including — perhaps ironically — one large group of retail insurance brokers obligated to ensure it is covered for cyber losses.
“It's nice to be able to provide a product where it's truly needed,” he says, and not just to groups like restaurant franchises that are contractually required to purchase Cyber Liability cover. “It's not an exposure that's going to go away. It's only going to increase.”
Power at Lexington regards the evolution of Cyber coverage as the classic example of the ideation process leading to market acceptance, which leads to product maturation, then often leading to hyper-competitive market conditions.
Although there's a lot of competition entering the Cyber Liability space, he adds, whether or not those players truly understand the opportunity — and the greater risks involved, which continue to evolve daily — remains to be seen.
Floodwaters from Hurricane Harvey flow in the Buffalo Bayou in downtown Houston on Aug. 28. (Photo: National Underwriter)
The Biggert-Waters Act of 2012 authorized the privatization of flood insurance, but clarification is still needed on the definition of what private flood insurance is, and what it would mean for consumers. WSIA continues to focus on that need by advocating for the bipartisan Flood Insurance Market Parity and Modernization Act. The improved definition provides lenders with clarity in accepting private-market solutions to fulfill the mandatory purchase requirement of the federal law.
Neither the House nor the Senate voted on flood legislation prior to the August recess. When the members return this month, there will be about 12 to 17 working days in the Chambers before the Sept. 30 deadline for reauthorization of the National Flood Insurance Program (NFIP), which remains nearly $26 billion in debt. The full House will need to vote on a consolidated bill comprised of the seven separate bills that have already been passed; the consolidated bill has not yet been released.
The Senate is expected to hold a mark-up on the version of the bill they released, and it is expected that the Flood Insurance Market Parity and Modernization Act will be offered as an amendment during the Senate process. Both chambers will eventually have to agree on the same language to send to the president, which is one reason many believe a short-term extension of the program is the most likely outcome.
"WSIA continues to diligently work with Congress and our fellow trade associations to see this critical piece of legislation passed," says WSIA Executive Director Brady Kelley. "We remain cautiously optimistic that it will be included in a final bill that is sent to the president for signature, either as part of a short- or long-term reauthorization of the NFIP or another means."
Kelley adds that political affiliation really shouldn't matter when it comes to a matter like Flood insurance. "The common-sense solution is to transfer some portion of the risk to the private market to reduce the exposure to the already bankrupt federal program,” he says. "We’re getting a lot of support from both sides of the aisle, looking to shift that exposure off the federal government's balance sheet."
"It's a huge opportunity, the next big one for the E&S business," adds Cavaness. As the focus shifts to the private market and Surplus Lines solutions are incubated, "the next 15 years are going to be really interesting."
While the encroachment of standard-lines carriers in the Surplus Lines market is nothing new, that doesn't make it less of a concern for E&S executives. (Illustration: National Underwriter)
Recent M&A activity has blurred many of the traditional lines that have long helped distinguish between those providers. At Associated Insurance Administrators, Senior Vice President Patrick Albrecht has been monitoring that activity closely.
"Companies like Cincinnati, Nationwide, Auto Owners and now Great American have all made significant strides through acquisitions and in creating divisions to offer E&S products," he notes. "Several continue to utilize the wholesale distribution channel, but others are offering these products directly to the retail agent.
"In these cases, the retail agent is incentivized through contingent commissions and/or rewards to place E&S business along with their standard business and often has strong relationships already in place," Albrecht adds. "My experience has demonstrated that it can be extremely challenging to break through that carrier-agent relationship to create or continue a flow of business to the wholesale channel."
Corinne Jones, CPCU, executive vice president of operations for AmWINS Access Insurance Services, offers a different perspective.
"There's always been blurring and movement between the standard and E&S marketplace; however, for the most part, they remain separate business segments and specialties," she says. "Given the scale and attractiveness of the E&S segment, many of the large standard-lines carriers have continued to expand in the space, and we’ve seen that with lots of M&A activity. We view this as a continuation of a trend rather than a new development."
"E&S is a vibrant segment of the market," she adds. "As long as there is complex specialty risk to be insured, there will be increasing interest, whether that's from existing standard-market carriers, institutional investors, reinsurers or ILS players. Ultimately, it creates more opportunity for all participants in the E&S space."
That begs the question: Where does one draw the line anymore?
“The strength of the wholesale channel has always been in the product and territory expertise and the relationship of the underwriter/broker and the agent,” says Albrecht. “The opportunity lies in our strength, but the wholesale industry must continue to create and market its own underwriting expertise. Leveraging that expertise will allow wholesalers to exploit the opportunity in their own offices in a way that is unique to their operation. Whether that's territory knowledge, retail agent relationships, niche products, cutting-edge technology, data-driven marketing or other specialized services, every wholesaler can utilize that focus to bring its expertise to bear."