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CAPACITY UP, PRICES DOWN IN SURPLUS LINES MARKET

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The surplus lines market is softer than ever, with capacity going up and prices coming down for even the toughest classes of business.

Traditional surplus lines marketers also are working harder to keep from losing ground to new players coming into the market.

Surplus lines markets also are developing new coverage facilities to respond to the few pockets of the commercial property/casualty market that have remained somewhat tight.

"It's a lot more work for brokers" to keep business at renewal time, said Pennington H. Way III, executive vp of Reliance National Insurance Co. of New York.

Reliance National oversees Reliance Group Holdings' surplus lines operations. "Every renewal is like a piece of new business," he said.

And that means insurers must reassess the accounts with the same attention to detail and intensity as if they were analyzing them for the first time.

But, "if you're a risk manager of a large sought-after corporation, it's probably much like shooting fish in a barrel," quipped Mr. Way.

"Rates are still coming down as much as last year when we all thought it had bottomed out," said Robin Henderson, senior vp and casualty manager for Stewart Smith West in Glendale, Calif., a division of Stewart Smith Group Inc. and a unit of Willis Corroon P.L.C.

She estimated that casualty business is renewing at premiums as much as 25% below last year's.

The "differential is not as great for smaller risks, which are down maybe 5% to 10% from last year," observed Bob Keul, vp-underwriting at Scottsdale Insurance Co., a unit of Nationwide Mutual Insurance Group in Scottsdale, Ariz. "But anything with a six-digit premium is subject to major cuts."

Indeed, "it's still a buyers' market," agreed Marcus Payne, president and chief operating officer of surplus lines broker Crump Insurance Services Inc. in Dallas.

While casualty is the most cutthroat line, prices are also falling on the property side-even for California earthquake and coastal windstorm risks.

"All we're seeing now are decreases everywhere," said Paul McCain, vp-property broker for Crump in Dallas.

For example, rate cuts on tough property accounts, either by class of business or loss experience, range from 25% to 35%, according to Mr. McCain.

"One energy account with horrendous loss experience saw an

almost 50% cut" in premium, Mr. McCain recounted. "The higher the premium, the bigger the cut."

California earthquake insurance renewal premiums are coming in 8% to 10% below last year's, while Florida hurricane rates are anywhere from 5% to 10% under 1996 premiums, estimated Ralph J. Palmieri, president and chief executive officer of underwriting manager First State Management Corp. in Hartford, Conn.

By comparison, non-catastrophe property rates are down 5% to 8%, he said.

"It varies from line to line, but also by sub-line," he said.

On the excess side, rates continue to decline anywhere from 10% to 15%, while capacity seems to be increasing almost continuously. It takes fewer insurers to assemble sizable limits than it did in the past, he said.

"There seems to be no end to the amount of capacity available for excess and umbrella business," Mr. Palmieri observed.

"Overall, the market's as loosey-goosey as it's ever been with early-1980s pricing," said Paul W. Springman, president of underwriting manager Shand Morahan & Co. Inc. in Evanston, Ill.

As a result, "we have to run two or three times faster just to keep the same position in the race," he said, comparing surplus lines market competition to a marathon.

"It's the same record as was played last year, except property is even softer," said Dave Hartock, president and CEO of Swett & Crawford Group in Los Angeles.

Mr. Hartock, formerly president of Sherwood Insurance Services, recently took the helm at Swett & Crawford after the wholesaler was acquired by Aon Corp., Sherwood's parent.

He estimated that cuts in July renewal premiums are averaging anywhere from 10% to 30% in all lines.

Helping to put pressure on pricing in all lines is the increased capacity coming from new players in the surplus lines market.

Among the new competitors are reinsurers and standard insurance companies that have formed specialty units.

"Every large, standard market

insurer either is in or is about to be in our side of the business," said Scottsdale's Mr. Keul.

And it seems new surplus lines insurers are continuously being

formed, he said.

"Fifteen years ago, there was one surplus lines insurer in the metropolitan Phoenix area. Now there are 10," Mr. Keul estimated.

Reinsurers are also starting to compete for surplus lines business, said Swett & Crawford's Mr. Hartock. They're bypassing insurers and "going direct to the source," he said.

In fact, several reinsurers tried to solicit business from wholesalers at the May 18-21 American

Assn. of Managing General Agents conference in Kona, Hawaii, according to Mr. Springman of Shand Morahan.

"Our reinsurers are competing with us," he said.

Lloyd's of London also has

returned to the market in a big way, having overcome its security concerns with the creation of Equitas Ltd., according to Mr. Springman.

Equitas was set up last year to take over Lloyd's pre-1993 liabilities.

"Once Equitas was established, we've seen London underwriters come back more aggressively, offering three-year programs, reinstated aggregates and aggressive pricing," he said.

Mr. Springman said the ongoing turmoil at the Illinois Insurance Exchange has been hardly noticed at renewal time.

The IIE had three syndicate insolvencies during an eight-month period from late 1996 to early 1997 (BI, June 9; March 10).

"For every account that comes out of the exchange, there seems to be a ready underwriter willing to take it on with the same terms," he said.

Still, some segments of the market are likely to remain tough no matter how soft the overall surplus lines market gets, most surplus lines marketers and underwriters say.

"If you're an obstetrician in Harris County, Texas, looking for malpractice insurance, you don't think it's a soft market," pointed out Mr. Springman.

Obstetricians there, which is the Houston area, are looking at six-figure premiums for just $1 million to $2 million in medical malpractice coverage, Mr. Springman estimated.

Prices are holding firm for small law firms' professional liability coverage, too, according to Mr. Way.

"We do have greater loss activity in that size firm," he said.

And while the entertainment field is extremely competitive, "there's some pulling back in some classes like promoters, film and rap concerts," he said.

There is a light at the end of the tunnel for at least one traditionally tough class of business, though: California contractors.

"While California homebuilders is still a tough market, more companies are willing to address these risks," said Mr. Payne of Crump. "We're putting together a program."

And Stewart Smith-West began marketing a new facility in April that somewhat hedges its bets in this area by requiring policyholders to submit to a risk management review before coverage is bound.

"They have to be risk management-oriented," explained Carole Fleischman, senior vp.

Already the Glendale, Calif.-based broker has produced $5 million in premiums for the new coverage, though she said that

the company has declined at

least 50% of those that have applied.

The facility provides up to $5 million in limits for primary liability, architects errors & omissions, product liability and completed operations for a minimum premium of $50,000, Ms. Fleischman said.

The residential program is underwritten by Legion Indemnity Co., and the commercial builders program is underwritten by Legion Insurance Co., both based in Philadelphia.

Crump is developing programs for some special risks, such as ambulances and small-employer workers compensation in New Jersey, according to Mr. Payne. The New Jersey workers comp program will be written on an admitted basis by Meadowbrook Insurance Co. located in Southfield, Mich.

In fact, more surplus lines insurers have established affiliates or units that can write in the admitted market what has traditionally been written on a non-admitted basis.

"There's going to be more program business" in the surplus lines market, he predicts. That's because programs, which group smaller but homogeneous risks together, provide for economies of scale, he explained.

Scottsdale's Mr. Keul agreed, pointing out that competition in the non-profits' directors and officers liability market has prompted the insurer to offer other coverages to its policyholders.

"We're doing package policies," he said, assembling property, casualty, transportation and directors and officers for non-profit organizations.

"We're the be-all-things surplus lines market," he said.

Only a major catastrophe, like an earthquake in downtown Los Angeles, or a hurricane in New York, is likely to have any impact on the soft surplus lines market, observers say.

But even that is unlikely to make much of a dent unless it's also accompanied by a sudden change in interest rates or a stock market crash.

"The financial market plays a not insignificant role in the energy and strategy of the commercial insurance industry," observed Mr. Palmieri.