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Ample capacity keeps E&S rates down

Posted On: Sep. 4, 2017 12:00 AM CST

It is still a buyer’s market for excess and surplus lines, with significant capacity and continuing rate declines — although there have been rate hikes in select lines — say experts, who generally predict the overall soft market will continue for the foreseeable future.

Cyber continues to be a “hot” product line, along with representation and warranties coverage (see related story).

Meanwhile, merger and acquisition activity in the sector is expected to continue, say experts (see related story).

“There’s still quite a bit of capacity, and the lack of significant (catastrophe) activity or losses has really helped to keep the capacity high and put a downward pressure on rates,” said Kyle Sliwerski, San Franciscobased senior vice president for the Western region for Lockton Cos. L.L.C.

The E&S market is “weak, but kind of bumping along the bottom,” said Hank Haldeman, president of Anaheim, California-based G.J. Sullivan Co., an excess and surplus lines broker.

“You do see continuing competition on rates, but a lot more discussion of holding the line and looking more granularly at where more rate is needed and where less rate can be taken,” he said.

Despite the soft market, “there’s not an irrational level of competition that I’ve seen in previous soft cycles,” said John Edack, San Francisco-based senior executive vice president of E&S casualty for Arch Capital Group Ltd.’s U.S. insurance group.

“I still see a fairly judicious use of limits,” while “critical terms and conditions remain stable. We’re not seeing multiyear deals. They’re very rare,” he said.

In the environmental insurance market, “Each carrier is what I call picking their spots,” both in terms of industry sector and the type of product where they want to be competitive, said Marcel Ricciardelli, Philadelphia-based senior vice president of the casualty-environmental and engineering division at Allied World Assurance Co. (U.S.) Inc.

In the management and professional liability space, “Rates have come down, probably on average, depending on the product,” between 4% and 7%, but “have gone up in certain areas,” as well, including construction and energy casualty, said Christopher J. Cavallaro, CEO of Jericho, New York-based wholesaler ARC Excess & Surplus L.L.C.

“There are some firming niches,” including trucking, New York construction and long-term care, where there has been adverse development, said Timothy W. Turner, Chicago-based president, and CEO of R-T Specialty L.L.C., a division of Ryan Specialty Group L.L.C.

The soft market is expected to continue, say observers. “Rates will continue to be soft, probably through a good part of next year,” absent any major climate-related events such as a huge hurricane or terrorist attack that causes irreparable harm and damage to the industry, Mr. Cavallaro said.

At that point, though, “underwriters will start to run cash flow negative in many product lines,” and at the “very least” stop rate reductions, he predicted.

Mr. Haldeman said, however, that “we are seeing California, which is pretty much a bellwether state,” reporting an uptick in premiums, “which generally is a harbinger of a tightening market, or at least an indication of business is moving from admitted to nonadmitted.”

Meanwhile, experts generally say standard lines’ encroachment into the E&S space is no more than what can be expected in the soft market.

“It always occurs in a softening market,” although “the standard markets have gotten much better at understanding their data” and what they want to target, said David W. Schraeder, Houston-based senior vice president of the custom accounts division at Hartford Steam Boiler Inspection & Insurance Co., a unit of Munich Reinsurance Co.