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Excess and surplus lines overcapacity drives prices down, diversifies offerings

Increased competition prompts insurers to scope specialty risks


ATLANTA — Overcapacity in the excess and surplus lines market is pushing rates down and prompting insurers and brokers to diversify their product and service offerings.

And while the effect varies according to geography and industry, the pressure on rates is greatest in the large commercial property sector.

“The big news this year is rate reductions,” said Stephen Scialdone, New York-based vice president and national underwriting leader of commercial property at Hiscox USA. “Now that rates have come down 5% to 10%, there's a lot less margin in the business.”

Alan Jay Kaufman, chairman, president and CEO of insurance brokerage and underwriting manager Burns & Wilcox Ltd., agreed.

“There are just too many carriers chasing the same business,” Mr. Kaufman said. In addition to E&S insurers, standard insurers have become more active in the commercial property market, he said.

“The standard carriers are stretching into the gray areas that are normally part of the E&S market,” Mr. Kaufman said.

Relatively benign natural catastrophe losses over the past several years also have affected rates.

“There've been a few storms here and there, but there hasn't been a good reason for rates to go up given the capacity that is out there,” he said during the National Association of Professional Surplus Lines Offices Ltd.'s annual conference in Atlanta last week.

William Roscoe, Atlanta-based focus group leader for the Southeast E&S property team at Beazley P.L.C., agreed that the absence of large loss events was an important market factor.

“Reductions next year are inevitable in the absence of any catastrophe activity between now and the end of the year, and it's been quiet so far,” Mr. Roscoe said. “When it comes to the rate environment going into 2015, if you are having a conversation with an underwriter in the large commercial property (market), there's talk of double-digit reductions.”

In response, Mr. Scialdone said his team is looking for synergies with other lines of excess business that Hiscox writes, such as terrorism and construction coverage.

Nonetheless, he said the insurer will maintain underwriting discipline and not chase business for the sake of premium growth.

“Overall, the bottom line is much more important than the top line,” he said.

“The challenge is finding the right mix of new business while maintaining underwriting discipline,” Mr. Roscoe said. “The question is which carriers will follow the market down and agree to relaxation of terms and conditions above and beyond the rate reductions.”

Since the large commercial space is so competitive, Mr. Roscoe said Beazley is looking to midsize buyers.

“For the next year, for us there seems to be more opportunity in the smaller space,” Mr. Roscoe said.

Noting that Burns & Wilcox's parent company, H.W. Kaufman Financial Group, had recently acquired London-based Lloyd's of London specialty marine and energy broker Oval International Ltd., Mr. Kaufman said his firm also is looking to diversify by embracing new products and expanding its global footprint.

“Energy is an area we want to grow in,” Mr. Kaufman said. “London is the epicenter of the global insurance market, and having feet on the ground there is essential for us.”

Moreover, Mr. Kaufman said the E&S market is a natural place for buyers to get coverage for cyber risk, given the deep expertise needed to underwrite the fast-evolving risk.

“Cyber is an example of a risk that the E&S market can do as the overall market softens,” he said, as it involves customization.