COMPETITION FOR SURPLUS LINES BUSINESS KEEPING RATES DOWN

Surplus lines renewals should provoke celebration among buyers, because insurers are undercutting each other to get the business, market watchers report.

"If it's a large risk, it almost reminds me of an auction and the frenzy that happens at an auction," reflected Marcus Payne, president and chief operating officer of Dallas-based wholesaler Crump Insurance Services Inc., a unit of Price Forbes North America. "A big risk gets caught in there and people's appetite gets after it, and they keep reducing the rates until they get it down as much as 50%."

Competition in the surplus lines market is so fierce some observers say it reminds them of the late 1970s, when "cash-flow underwriting" was rampant, and insurers hoped investment yields would compensate for their underpricing.

"I don't see any firming up of pricing anywhere," said Pennington H. Way III, executive vp of New York-based Reliance National Co. who oversees the Reliance Insurance Co. of Illinois surplus lines unit in Chicago. "I've never seen more of a buyer's market."

The competitive conditions make it "very difficult for underwriting companies to maintain premium volume and underwriting integrity at the same time," Mr. Way said. "A lot of companies must be deluding themselves on the loss development they're expecting."

Bob Keul, vp-underwriting at Scottsdale Insurance Co., agrees.

"The market is still really in turmoil, with business being written at pricing levels insufficient to carry known or reported losses," he said.

Overall, 1996 premium volume for the Scottsdale, Ariz.-based surplus lines unit of the Nationwide Group is about 5% below projections, Mr. Keul said.

"But we're only 4% below last year," he pointed out, adding that Scottsdale made conservative projections for 1996 because of the enduring soft market.

Other insurers are in the same situation, observers point out.

Brokers are pressuring Reliance to put certain lines previously written on a surplus lines basis on admitted paper, Mr. Way said.

"We're having to move and make filings in a couple of states for architects and engineers E&O," he said. Among those states are California and Massachusetts.

Despite the fact that insurers' business projections may be down and they are facing more competition from London, the admitted market and other surplus lines companies, several say they continue taking a conservative approach to underwriting risk.

"We're trying to be smart risk-takers so we'll be here tomorrow for our clients," said Kevin Kelley, president of Boston-based Lexington Insurance Co., a surplus lines unit of American International Group Inc. "We're in the high-risk business and, therefore, we think prudent clients would want a carrier to take appropriate care when underwriting."

Pricing for smaller accounts is more stable, with the competition the toughest for large accounts placed by surplus lines brokers, Mr. Keul said. As an example, he described the casualty coverage placement for a distributing company that would have been a new account for Scottsdale.

Scottsdale's underwriters originally estimated the premium at $1.2 million and reduced it to $950,000 after negotiations with the broker.

"But we lost the business when the risk was bound at $600,000 by another carrier," Mr. Keul said.

Some observers see renewal business receiving the most favorable treatment from insurers, courting it like accounts they are trying to win for the first time. But others also see a big push for new business.

"(Underwriters are) under a lot of pressure from the home office to write new business," said Ron Stone, senior vp and branch manager in San Francisco for Swett & Crawford Group.

"About the only place where there is a tightening of the market is in residential contracting," Mr. Stone said. "There is a market; it's just that they have to pay for it."

Because of numerous lawsuits over alleged building defects-especially in condominium construction-general liability coverage for California home builders has been a problem area (BI, Nov. 11, 1996).

But the same problem could surface in other states, like Texas and Nevada, where construction booms are under way, Mr. Stone said.

"We hear rumors of California attorneys getting licensed in Nevada and Texas," he explained. "Texas we are hearing that it is starting to be where California was three or four years ago."

Professional liability for insurance agents also remains hard, though it has softened somewhat over the past year, insurers and wholesalers said. But it has not softened nearly as much as other lines.

"We went into 1996 expecting that the casualty market had somewhat stabilized and yet we found we were off base because we saw casualty rates go down 25% to 50% depending on the individual risk," Crump's Mr. Payne said.

"It didn't get any better as the year went along," he said. "It continued to get worse, and it's about as tough right now as we have ever seen it. The standard markets are still writing risks that normally and historically have been in the excess and surplus lines (realm) and some risks they had let go of and have now taken back. Umbrella coverage has almost completely become a standard coverage now."

While directors and officers liability insurance remains mostly an excess and surplus lines coverage, rates have dropped 20% to 25%, with more capacity available and increasing competition from the standard market, Mr. Payne said.

D&O coverage for high-technology companies was a stable market for insurers and wholesalers, but it also has seen the steep drops now familiar among other lines of D&O insurance, said John G. Hahn, president of San Francisco-based Tri-City Brokerage Inc. Rates continue to drop because more insurers have entered the market, he said.

"It's taken the same big 25% to 45% slices some of the other lines have taken," Mr. Hahn said. "Where two years ago there was a handful of players, there are probably two or three times that many today."

Product liability has softened 10% to 15%, with higher limits easier to obtain, Mr. Stone said. There are standard market insurers writing product liability that were not in that line of business two or three years ago.

Stability also has disappeared from property coverage, further eroding rates that already were low, observers said. Rates dropped 10% during the first part of the year and then continued down to 25%. The same happened in the high excess liability market.

The commercial earthquake market has softened unless the property is on fill dirt or a fault line, or the building was constructed before 1982, Swett & Crawford's Mr. Stone said.

"That can get tough," he said. "You have to go into London or you pay a lot of money for it with high deductibles of up to 25% or 30%."

But normal building renewal pricing is down anywhere from 10% to 20%, and more capacity is coming on line, Mr. Stone said.

"Right now, even the catastrophe property area that a year ago was holding relatively firm, we are seeing pretty significant amounts of competition in all lines, whether it's wind or earthquake," Tri-City's Mr. Hahn said. "Everyone seems to be playing."

"Earthquake is stable," Crump's Mr. Payne said. "But even it is starting down now. Capacity is still a problem in some areas, but you can pretty much get the risk placed, and sometimes the rates are lower than what you would have thought going in.

"It just means it's tougher and tougher out there for excess and surplus lines wholesalers," he continued. "I say that, but on the other hand we are going to show a growth this year of about 11% in premium volume."

"We're all chasing the same amount of accounts and premium dollars that are out there with more capacity chasing them and more pressure to maintain your accounts and more pressure to produce the business," added James W. Barnes, chairman and chief executive officer of San Francisco-based wholesaler Sherwood Insurance Services.

Surplus lines insurers also are writing larger layers of coverage in just about all lines, observers said.

"The drive is there to keep increasing the limits you have available," Mr. Way said. "This fuels the softening of pricing. Reinsurance capacity also is extremely plentiful."

"I can put $100 million in limits together today in two phone calls for high casualty if I can get the right underwriter and get the right account," Mr. Stone said. "With four companies you could easily put $100 million together. You can name companies in both hands that have $25 million in house, net-and-treaty capacity just sitting there.'