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The opening line in Charles Dickens' "A Tale of Two Cities" aptly describes the current state of the surplus lines market: "It was the best of times, it was the worst of times."

It's certainly the best of times for buyers, but the worst of times for most wholesalers and surplus lines insurers, which are scrambling to get and keep business in a competitive marketplace.

"It's a buyer's market, and brokers and risk managers are sitting in the catbird seat," observed Bob Cohen, senior vp of United National Insurance Co. in Bala Cynwyd, Pa.

David Hartock, president and chief executive officer of wholesaler Swett & Crawford Group in Los Angeles, agreed. "Generally speaking, it's still very soft, and there's a ton of capacity," Mr. Hartock said.

"I'd call this market a surprising market because there's a surprise every day," remarked Marcus Payne, president and chief operating officer of wholesaler Crump Insurance Services Inc. in Dallas. "Just when you think it can't get any lower, it does."

He also pointed out that many admitted insurers are competing for what has traditionally been surplus lines business, such as specialty property and liability lines.

In fact, Mr. Payne says he's seen rate reductions anywhere from 20% to 60% below last year's already bargain-basement prices.

Among the most significant reductions:

* Primary general liability is down anywhere from 30% to 40%.

* Lower-layer excess liability is down 50% to 60%, depending on the class of business.

* High-layer property catastrophe excess coverage is down as much as 30%.

* High-hazard liability coverage, such an environmental, is down as much as 50%. Mr. Payne said this is one example of business for which admitted insurers are competing with surplus lines underwriters.

* Commercial property is down anywhere from 20% to 60%, depending on the risk.

* Highly protected risk is down 10% to 15%.

* Directors and officers liability insurance is down 10% to 15%.

* Errors and omissions and other professional liability lines are down 5% to 15%.

"We just had a risk in the casualty department -- structural steel manufacturers, which is a hard-to-place line -- that last year renewed at a premium of $187,500 with a $75,000 SIR. This year, it went for $100,000 with no deductible," Mr. Payne recoun-ted.

Crump also placed a property program for a large retail chain at half of last year's $4 million premium, even though "the losses were more than the renewal premium," he said.

But some wholesalers, including Evanston, Ill.-based Shand Morahan & Co. Inc., are taking advantage of the cross-selling opportunities the soft market has created.

"We're absolutely overwhelmed with new business, and we couldn't be happier with the way that the market is treating us," said Paul Springman, president of Shand Morahan, the underwriting manager for Evanston Insurance Co. He estimates new business submissions are up 40% from last year at this time.

"And we're up another 20% in the first six months of this year," he said.

Mr. Springman attributed most of the growth to the company's new underwriting approach.

"We've moved away from a product concentration where we were very rigidly divided within our underwriting division along product lines and shifted to a regional customer focus, where each one of our brokers has a single underwriter that they come to for all of their Shand-Evanston business," he explained. "We call that strategy 'Source One' because it's one underwriter, one fax number, one phone number -- the equivalent of the Nordstrom's personal shopper."

"It gives us tremendous cross-selling opportunities. And when we make a strategic decision, such as we want to increase our rates in one particular area or de-emphasize one product line because of a problem or less of an opportunity, it gives us a chance to really push something new like employment practices liability that we're just selling like hot cakes," Mr. Springman explained.

The new strategy also makes it possible for underwriters to build relationships.

In some cases, Shand underwriters are going so far as to work directly with buyers to develop comprehensive property/casualty programs rather than sell insurance products piecemeal, according to Mr. Springman.

In fact, Shand used this approach in handling the recent coverage placement of an East Coast manufacturer of lab testing kits for animals.

"It came to us as a products liability account with a miscellaneous E&O component" for data processing exposures, Mr. Springman recalled.

"But in probing with the broker, the underwriter learned that not only did the insured manufacture these testing kits, they also had a veterinary clinic at their home office location and they had on staff an animal cardiologist and an animal oncologist and all sorts of clinical trials that they were performing," Mr. Springman said.

"So we were able to take the general liability form, pick up the products liability exposure, add on the miscellaneous medical malpractice exposure, pick up the malpractice for the veterinary clinic, the malpractice for the cardiologist for the dogs and the oncologist for the cats, pick up the electronic data processor E&O exposure for the information that was being transmitted electronically and wrap this all into one cover," he explained.

"This is not the sort of product that you can go through the grocery store and just pick up off the shelf," Mr. Springman said. "They had six different policies from five different markets that we were able to put all into one contract with a common date and give them truly a one-stop shopping experience."

Many surplus lines insurers are providing risk management services to policyholders to attract and/or retain their business.

"We've developed services to make them better risks," explained Kevin Kelley, chairman and CEO of Boston-based Lexington Insurance Co., a subsidiary of American International Group Inc.

For example, Lexington has a toll-free number that buyers of its employment practices liability coverage can use to speak directly to attorneys on staff.

Supplying such services has enabled Lexington to improve its EPL retention rate, which Mr. Kelley estimates at 65%.

"We pioneered the product and continue to have the leading market share," he said.

But while Lexington may have been the first to introduce EPL coverage in the early 1990s, there are now numerous underwriters -- some say as many as 40 companies -- willing to write the product. It's a good thing, too, according to surplus lines marketers, because demand for EPL coverage is growing.

"There's so many new buyers coming into the marketplace that we're having a tough time just keeping up with the demand," said Shand's Mr. Springman, adding that this may be partly due to the fact that "we're starting to see our first batch of agents' and brokers' E&O claims coming from clients whose brokers did not advise them of the availability and the cost of EPL insurance."

"We've found that the savvy wholesale brokers that understand what's going on in the rest of the marketplace are counseling their clients to take a little bit of that money that you saved in this soft GL market. . .and let's explore the feasibility of buying an EPL product," he said.

"We're seeing a lot more interest in EPL," concurred Swett's Mr. Hartock. While initially the demand was greatest on the East and West coasts, "we're now seeing more demand in the midsection of the country," he said.

Fortunately for buyers, employment practices liability coverage rates are coming down as a result of the newborn competition.

"EPL rates are down 10% to 25% from last year," Mr. Hartock estimated. "And limits are up to $150 million to $200 million."

The soft market is even having an impact on a traditionally hard-to-place line: California contractors.

"It's still relatively soft even though residential builders are difficult to write," said Carole Fleichman, senior vp at wholesaler Stewart Smith West Inc. in Glendale, Calif.

She believes that the California Supreme Court's 1995 Montrose decision that applied a continuous trigger to pollution cases, and which is now being applied to construction defect cases, may have actually helped insurers by creating some certainty about their exposure for the risk (BI, July 10, 1995).

"And a lot of carriers have put on Montrose exclusions," she added.

Despite the overall soft market, insurers in the surplus lines market are bracing themselves for the one exposure that has the potential of turning the market: Year 2000.

"There's a big fear in the industry how to underwrite this exposure if you don't exclude it," said United National's Mr. Cohen.

"We're preparing for a hurricane and hoping that it turns out just to be a mild tropical breeze," said Shand's Mr. Springman. "It has the potential of being a very significant event."

Shand and Evanston have introduced Year 2000 exclusions on some professional liability policies, such as D&O liability insurance, and are surveying policyholders about their efforts to eliminate Year 2000 computer problems during the underwriting process.

Lexington also is attempting to underwrite the exposure, according to Mr. Kelley.

But even if Year 2000 exposures are excluded from liability policies, United National's Mr. Cohen predicts new products soon will be offered to cover these exposures.

As Mr. Springman put it: "Everybody knows what the problem is, most everybody knows how to fix it; it's just a problem of time and resources, and whether or not people are going to be able to do it in time."