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The surplus lines market is playing out its version of the Ernest Hemingway classic "To Have and Have Not."

What the market does not have -- premium growth -- may be the most glaring element of the story. Indeed, one insurer rating agency, Moody's Investors Service Inc., recently concluded that the surplus lines market's short-term prospects for premium growth are "dim," as the seemingly never-ending supply of capital stokes competition for almost any kind of business.

The prospect of rate and form deregulation of admitted insurers writing large commercial risks could lead to even further competition for surplus lines business. However, many analysts and industry executives say the impact would be marginal, because the admitted market's competitiveness already is so fierce.

Still, surplus lines insurers and wholesalers have a few important things going for them that show those challenges will not be their undoing, market executives and rating agencies say.

Despite falling premiums, many surplus insurers reported strong profits in 1997. Executives for many insurers explained that their underwriters are walking away from business that will not achieve their profit margin goals.

"As growth in premiums diminish, some players won't make it. That's not to say the entire industry will fold up and go away," observed Harry E. Comninellis, a Moody's analyst in New York.

In addition to last year's profits, analysts with both Moody's and A.M. Best Co. of Oldwick, N.J., noted that the surplus lines insurance market's capitalization is stronger than that of the entire industry. And the surplus market's solvency rate is comparable to the admitted market's, according to the agencies.

The surplus lines market also has a strong reputation as an incubator of new coverages, a role the market is likely to continue to play, according to the analysts with Best and Moody's.

But, as last year's results show, premiums generated by new products will not always make up for business lost to competitors. For the first time in nearly a decade, the nation's 10 largest surplus lines insurers in 1997 reported a drop in non-admitted direct written premiums as a group. With seven of the insurers reporting decreases, written premiums for the group fell 4.5% to $3.88 billion in 1997 from less than $4.07 billion in 1996. That year, only two of the insurers reported decreases in written premiums.

The 1997 decrease for the Top 10 more than doubled the 2% industrywide premium downturn. For years, the Top 10 insurers had, as a group, fared better than the surplus lines industry. The Top 10 boosted written premiums while the industry lost premiums in 1994 and 1995. And, with its 6.5% written premium increase in 1996, the Top 10 eclipsed the 4.6% industrywide gain in 1996 by 41%.

The last time a group of the 10 largest surplus lines insurers reported a decrease in direct non-admitted premiums was in 1988, but the premium swoon then was much steeper. Non-admitted direct premiums plunged 16% in 1988 to $2.28 billion from nearly $2.72 billion in 1987.

In 1988, admitted insurers were pulling out of their hardest-ever market and competing with the surplus lines market for non-admitted business for the first time in several years.

Compared with surplus lines insurers, the 10 largest wholesalers managed slightly better results in 1997. But, for many wholesalers, premium volume slackened. With half of the wholesalers reporting premium volume decreases, the group of 10 companies eked out less than a 1% gain to $3.74 billion.

The top five managing general agents and underwriting managers were slightly more successful than the five largest wholesale brokers. The MGAs and underwriting managers generated a 1.3% gain in volume to $1.54 billion compared with 1996. The five wholesale brokers' premium volume dropped 0.59% to $2.2 billion in 1997 compared with the 1996.

An oddity in the rankings this year is that the same companies comprised the Top 10 surplus insurers and Top 10 wholesalers for the second consecutive year. For numerous years, there has been at least one change in the roster of companies that make up those two groups. Industry consolidation, a significant downturn in business for a company in one of the groups or a spike in business for a company that had just missed making the rankings a year earlier typically led to those changes.

In addition, there were only minimal changes in how the companies ranked against each other.

Among the largest surplus lines insurers, the rankings of the six largest companies were unchanged. The most significant movement was by Columbia Casualty Co. Its relatively robust 11% gain in 1997 non-admitted direct premiums boosted the CNA Insurance Cos. subsidiary to No. 7 from No. 10. The insurers that ranked seventh through ninth last year each dropped a notch in this year's rankings after their 1997 non-admitted premiums shrank between about 2% and 9%.

The rankings of the 10 largest wholesalers were only slightly more dynamic. The top two and bottom two wholesalers in the group retained their rankings from a year ago. The middle six moved up or down only a notch or two.

The first half of 1998 signaled another lackluster year in terms of premium volume for many surplus lines insurers and wholesalers.

Some insurers and wholesalers, though, managed much stronger results despite continuing soft market conditions.

Competition has resulted in 10% to 25% price reductions "on any policy" that wholesaler Crump Insurance Services Inc. of Dallas has renewed, said Orville D. Jones, Crump chairman and chief executive officer.

"We're actually issuing more policies, but we can't catch up to the dollar amount," said Herbert W. Kaufman, president and chief executive officer of wholesaler Burns & Wilcox Ltd. of Farmington Hills, Mich.

Surplus lines executives typically have few reservations describing how they think admitted insurers often naively and indiscriminately have competed for surplus lines business.

Lorna Parsons, a senior vp with The Schinnerer Group Inc. in Chevy Chase, Md., was highly critical of underwriters for established admitted and non-admitted markets chasing professional liability coverage for the first time, as well as new market entrants with little professional liability underwriting experience.

"The new entrants have no idea of the real profitability level that they're entering at, because of the long tail of this business. So, they merrily jump in at the current market price, cut the market price to get share and probably have no clue what they're doing to their book as a whole."

Patricia Roberts, a senior vp at General Star Indemnity in Stamford, Conn., said any six- and seven-figure account has been able to negotiate 20% to 30% price reductions with limit increases.

Many surplus lines executives said they do not fear the commercial lines deregulation that the National Assn. of Insurance Commissioners is evaluating. A regulatory re-engineering proposal that an NAIC committee's working group has proposed would exempt large commercial insurance buyers from most regulations governing their policies, including rate and form requirements.

Surplus line insurers already have that advantage, which allows them to react more quickly than can admitted markets to risks. But admitted insurers, whose risks are protected by state guaranty funds in case of insurer insolvencies, must reject a risk before it can be placed within the non-admitted market, where there is no guaranty fund protection.

Opinion among wholesalers is so mixed about the potential impact that deregulation would have on the surplus lines market that the National Assn. of Surplus Lines Offices has not taken a position on the issue.

Wai H. Tung, a senior financial analyst in Best's property/casualty division, said he could not predict whether large policyholders would be swayed by the benefits of deregulation or continue to count on the non-admitted market's demonstrated expertise in writing certain risks.

Many other industry observers expect that commercial lines deregulation would have little impact on the surplus lines market.

Because of their greater costs, big insurers have to write a greater amount of business than do surplus lines insurers, said Albert L. Salvatico, a principal with wholesale broker ARC Excess & Surplus L.L.C. of Mineola, N.Y.

But some buyers may need more creative policies, not greater limits, he said. "It may cost big insurers too much to do that," especially for smaller risks, he said.

Moody's Mr. Comninellis said deregulation would create competition for only the largest surplus lines insurers, because it is focused on large insurance buyers. "But those larger players are formidable competitors. I don't expect them to give up," he said.

Noting that tough competition already exists and saying that many regulators already are willing to approve insurers' recommended form changes, underwriting manager executive William Kronenberg said that deregulation would be "like pushing along a speeding car."

Regulation, however, "acts as a control on underwriters from acting willy-nilly," said Mr. Kronenberg, president and chief executive officer of Exton, Pa.-based ECS Underwriting Inc., an underwriting manager for Reliance Insurance Co. of Illinois, the sixth-largest surplus lines insurer.

He asserted that underpricing is the insurance industry's biggest challenge.

Crump's Mr. Jones, the incoming NAPSLO president, said that fixing the cumbersome and complex surplus lines tax filing system would have a greater impact on the market. The system would be more efficient, but that could foster competition, he said.

Deregulation is not one of the things "that keep me up at night," said Paul Springman, the outgoing NAPSLO president. Deregulation would benefit certain large sophisticated buyers, said Mr. Springman, president of both surplus lines insurer Evanston Insurance Co. and underwriting manager Shand Morahan & Co. Inc., which are Evanston, Ill.-based subsidiaries of Markel Corp.

But accounts that generate six-figure premiums already have extremely attentive underwriters, who either ignore loss histories or naively believe they will be luckier than other underwriters, he said. Those insurers, though, have not focused on underwriting profits. Instead, they have depended on investment income, he said..

Mr. Springman said he is more nervous about the Year 2000 computer problem. In one case, he worries whether vendors could impair Evanston's and Shand's operations. For the industry at large, he is concerned about the potential Y2K losses for large standard stock insurers that have written occurrence-based umbrella and general liability coverage.

How the NAIC's deregulation proposal would impact the surplus lines market likely will not be a factor as the proposal moves forward, said Maryellen Waggoner, a member of the NAIC committee subgroup that prepared a white paper recommending deregulation.

Underpinning the working group's proposal was how regulators could better direct limited resources to protect more vulnerable policyholders than the large insurance buyers whose bottom lines, in some cases, are larger than their insurers' written premiums, explained Ms. Waggoner, deputy commissioner with the Colorado Insurance Department.

But Louisiana Insurance Commissioner James Brown, chairman of the NAIC's Surplus Lines Committee, said he would like the NAIC to evaluate several surplus lines-related issues before approving deregulation.

Mr. Brown said he does not object to deregulation. However, he would like the NAIC to consider how deregulation would affect the nation's guaranty funds. In addition, he would like to see deregulation limited to insurers that meet certain solvency requirements.

More so than premium volume, market executives point to net income as a measure of the market's success.

Net income gains of 20% to 60% were typical, and one insurer, Steadfast Insurance Co., reported a 15-fold gain. Another insurer, Acceptance Insurance Co., reported a $13 million profit in 1997 after posting a nearly $8 million loss the year before. Acceptance reported the second-largest drop in written non-admitted premiums among the Top 10 in 1997.

Market executives said they have focused on underwriting their many new coverages' profitability and have walked away from old business that no longer meets their profit margin goals.

"Competition is death," observed ECS Underwriting's Mr. Kronenberg.

Scottsdale Insurance Co., which reported a decline in non-admitted premiums for the third consecutive year in 1997, will not even try to compete on price against admitted insurers, according to R. Max Williamson, Scottsdale's president.

But walking away from business "doesn't mean you have to do poorer business," said ARC Excess & Surplus' Mr. Salvatico. "You can improve your book of business," he said.

The market can maintain its profitability as long as it keeps "the new-product pipeline flowing," Mr. Kronenberg said. "You can't keep the genie in the bottle forever. You have to find a new bottle and a new genie."

First-half 1998 net income figures for insurers, though, were more mixed. For example, United National Insurance Co. reported a 30.2% net income gain for the first half. But Lexington Insurance Co. and General Star Indemnity Co, which last year reported respective profit gains of 31.5% and 10.7%, each reported increases of less than 2% for the first half of this year.

Moody's Mr. Comninellis said the surplus lines market's profits may deviate somewhat but that he expects profits and returns on equity to continue to outpace the insurance industry's.

The surplus lines market still continues to churn out new coverage. Among those is Steadfast's professional liability coverage for companies that provide encryption of computer transmissions between businesses. Steadfast also is writing copyright infringement coverage for Internet Web site designers.

Lexington and J&H Marsh & McLennan Inc. have just launched a program that covers non-profit health care providers for liabilities arising from unintentional violations of Medicare and Medicaid claims-reporting rules.

Among the more than one dozen new products that Burns & Wilcox has introduced in the past year are a specialty program for craft beer brewers; a builders risk program for builders of log homes; and a large-prize indemnity program for contest sponsors.

Acceptance has introduced a medical malpractice program that targets specific physician groups, including anesthesiologists, obstetricians/gynecologists and maxillofacial surgeons, who are unable to obtain medical malpractice insurance in the standard market.

Wholesaler K&K Insurance Group Inc. has introduced a program that covers vending services at major sports stadiums.

Scottsdale offers errors and omissions coverage for managed care entities.

And Reliance of Illinois plans to unveil in the third quarter an Internet liability product designed to cover companies involved in electronic commerce for security-related risks.

Surplus lines insurers and wholesalers also are beefing up existing coverages, especially employment practices liability insurance.

Wholesaler Swett & Crawford Group recently introduced an EPL form under which policyholders have much greater coverage for punitive damages awards.

And wholesaler Stewart Smith Group last year launched an employment practices liability program for the fast-food industry.

In another area, General Star Indemnity now offers occurrence-based liability coverage to environmental contractors that install or remove underground storage tanks.

Wholesalers and insurers also increasingly are developing services to add value to their products, market executives say. For example, along with its new EPL coverage, Lexington is offering optional free risk management services, including an employment practices audit by the Baker & McKenzie law firm, toll-free phone access to an employment practices consultant and use of an electronic human resources reference system.

Wholesale broker Cooney, Rikard & Curtin Inc. of Birmingham, Ala., two years ago opened a claims department responsible for pressing its insurers to handle claims as quickly as possible and in accordance with policy language.

"It reinforces our relationship with the retail agent," said John Cooney, president of Cooney, Rikard. "If what we're doing doesn't improve our retailer's lot in life. . . we're doing something wrong."

Schinnerer has launched a service that uses interactive technology to speed up the quoting and ordering process for small associations.

In the not-too-distant future, wholesalers must be quicker in issuing mistake-free policies -- perhaps through direct electronic links with policyholders, said Mr. Jones, NAPSLO's incoming president.

Surplus lines companies also are continuing to investigate how technological enhancements can improve their operating efficiency. For example, at Scottsdale, all underwriting departments will be paperless by year end. After that, the insurer will turn its attention to electronically linking with agencies so it can receive policies electronically and to updating its claims-handling process.

NAPSLO has commissioned KPMG Peat Marwick to study the impact of information technology on the surplus lines industry and package the research so NAPSLO can forward recommendations to members.