After a long soft market, the excess and surplus lines market is beginning to see rate increases and the gradual flow of business from the admitted market, as admitted insurers cull their books with an eye toward increasing profitability, say observers.

However, the pace of that movement is slow, albeit steady.

Although reports vary, many observers say they are seeing either overall rate hikes of about 5%, or rate increases of that much or more in specific lines.

Barring any major catastrophes, this gentle upward slope is expected to continue (see story, page10).

A surplus lines report issued by Oldwick, N.J.-based A.M. Best Co. Inc. last week states that after a four-year decline, domestic professional surplus lines insurers reported a 3.2% increase in direct premiums written in 2011.

Rates are increasing overall in the zero to 5% range, with an increase in the exposure base as well, so there is a “double benefit,” said Matt Nichols, president of Hunt Valley, Md.-based All Risks Ltd. and incoming president of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices Inc.

Timothy W. Turner, Chicago-based president and CEO of R-T Specialty L.L.C., a division of the Ryan Specialty Group L.L.C., said, “Generally speaking, the market is soft, obviously, but there's a few niche-firming phenomena that are happening in New York construction, trucking, and cat property,” and there's an average of about a 5% increase that is taking place.

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Letha E. Heaton, vice president of marketing at Cherry Hill, N.J.-based Admiral Insurance Co. and NAPSLO immediate past president, said, “We as a company have seen some rate improvement in every product line,” including property, casualty, professional liability, excess and umbrella. “It looks like in some lines we're certainly over 6% and in some lines as much as 8% or 9%,” said Ms. Heaton.

John Edack, San Francisco-based senior executive vice president for Arch Insurance Group Inc.'s casualty division, said while “pricing is all over the map,” there is “a general trend of an overall rolled-up rate increase in the high single digits.”

Joel Cavaness, president of Itasca, Ill.-based Risk Placement Services Inc., a managing general agency, said, there has been a slight upward trend with respect to pricing.

“Somebody termed it as a "soft hard market,' which is probably a decent term to use,” Mr. Cavaness said. His firm's submission rate is up 20%, “which of course you hope turns into buying.”

Linc Trimble, Jersey City, N.J.-based senior vice president and head of excess casualty at Torus Insurance Holdings Ltd. who focuses on small commercial umbrella business, said, “It's not dramatic increases, but certain segments have seen large increases,” especially those with heavy auto fleet, construction or products exposures.

“But there's definitely a sea change in terms of rates,” which are increasing at about 5%, said Mr. Trimble.

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Adam Kagan, Fairfield, Conn.-based chief market relations officer for CRC/Crump Insurance Co. said, “We're seeing a rate environment of spot increases.” There is “definitely pressure in certain classes of business, including construction and catastrophe-exposed property business, he said.

“On the casualty side, we have seen increased rates since the beginning of the year,” although this past month “it has seemed to have gotten a little mushy, and I'm not sure why that is,” said Robert J. Lala Jr., Chicago-based senior vice president of primary casualty for Liberty International Underwriters, a unit of Liberty Mutual Holding Co.

Rates “are still going up slightly” in property lines, said Jim Dowdy, Atlanta-based vice president of excess property for Zurich North America Commercial. “There was a period where they increased a little bit more. I think that's kind of leveled off,” said Mr. Dowdy.

Alan J. Kaufman, chairman, president and CEO of Farmington, Mich.-based Burns & Wilcox Ltd., said property rates are going up slightly “in certain specific areas and regions of the country.”

“There hasn't been a major event that's impacted the market solvency, and the economy is still very weak,” he said.

Kevin T. Westrope, president and CEO of Kansas City, Mo.-based wholesaler Westrope, said, “Certainly, E&S looks like a pretty good place to be right now. While we don't see a tremendous amount of rate increases, we are seeing a lot of gray-area business from the standard market kind of migrating back to the E&S side of the business. Consequently, most of us are enjoying a pretty good uptick in business.”

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Business has been moving back into the excess and surplus lines market for some time now, which is typically a sign of “a general improvement in the overall conditions of pricing,” said Enrico Leo, assistant vice president at rating agency Moody's Investors Service Inc. in New York. Large property risks are moving back into the E&S market as well as general liability lines, he said.

Mr. Edack of Arch said, “The standard markets are coughing up business that they took on during the softening market, realizing now that they did not necessarily have the underwriting risk to handle such business.” Manufacturing, commercial and residential construction, certain energy classes such as oil and gas and mining are among the businesses returning to the E&S fold, he said.

James Drinkwater, property/ casualty brokerage division president of AmWins Group Inc. in New York, said, “The standard markets to some extent are analyzing their book based on the actuarial models ... and the overall complexion of their book, and they're balancing it accordingly, letting business go if it does not prove to be profitable, and they do not have expertise in the area.

“I think everything right now is being driven by concerns on the income statement side,” said David Blades, A.M. Best senior financial analyst.