Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

Turning up the Pressure

Reprints
Turning up the Pressure

Specialty lines underwriters are facing leaner times because of competition from admitted insurers for property/casualty risks.

To entice buyers now, those underwriters are feeling pressured to offer lower rates and more flexible terms and conditions, including some innovative ones.

The underwriters are faced with what the Insurance Information Institute describes as "a considerably slimmer margin of underwriting profitability."

It's part of the "apparent paradox" of peaking industry profits in 2006 and stalling premium growth, which is "a clear reminder of the cyclical nature of the property/casualty business," according to the III's special report issued in February.

Bill Newton agrees. He is president of the Kansas City, Mo.-based National Assn. of Professional Surplus Lines Offices Ltd., which represents nonadmitted insurers and wholesalers. "Underwriting profits in 2007 will be under attack," said Mr. Newton, who also is president of Los Angeles-based Lemac & Associates Inc., a division of Risk Placement Services Inc. that is a unit of Arthur J. Gallagher & Co.

"Competition is heated and getting to the point of being very heated," said Mark Maher, president of Manhasset, N.Y.-based NIF Group, which operates primarily as a regional managing general agent and broker. "Everyone is falling all over themselves to write noncatastrophe-prone property risks," he said.

If the admitted market continues to seek a larger market share, eventually there will be "a price war," said David J. Price, executive vp and chief underwriting officer of Burns & Wilcox Ltd. in Farmington Hills, Mich.

According to sources' estimates, rates for property not exposed to wind or earthquake risks are generally down by 10% to 20%, with some large risks dropping as much as 35% compared to a year ago.

The rate estimates for general casualty business are more varied and range from flat to down as much as 25% for primary and umbrella coverage for a six-figure account, sources say.

The market for directors and officers coverage is "a battleground" with rates for private companies down 30% to 40%, Mr. Price said.

'Wait-and-see mode'

Meanwhile, rates for catastrophe-prone property are flat to down 10%, sources say, in part because of increased capacity.

There is now enough capacity to fill the upper layers of placements in excess of $100 million, Mr. Newton said. Last year, larger placements typically had holes in some layers, he said.

In the medical malpractice market, "there is increased pressure on the soft market and the question is whether interest rates are going to fuel cash flow underwriting we saw in the past," said Craig R. Rowland, vp for large groups, facilities and new products at Fort Wayne, Ind.-based Medical Protective Co., a professional liability insurer. He also questioned whether reinsurers will enter the fray and competitively price their coverage, too.

The market for workers compensation coverage is now "sensible," said Patrick Sheehy, London-based director with BMS Intermediaries Ltd., which specializes in reinsurance. The market hit turbulence following the 1999 collapse of Unicover Occupational Accident Pool due to reinsurance losses related to carveouts. While the market has since regained balance, that may change because "there is an increasing appetite" among other insurers lured by profits in writing workers comp coverage, he said.

"There is a lot of capital in the market that is not being used," Mr. Sheehy said. He predicted that the excess capital will encourage consolidation among companies and prompt companies to expand into new lines of business.

Outside of cat-prone areas, "the rest of the country is very, very soft across every line of business," Mr. Price said. In part, that is due to the standard market redeploying capital from cat-prone areas, he said.

"We haven't seen a redeployment of Florida's reinsurance capital yet, but we do anticipate that," Mr. Maher said.

"It's got to find a home somewhere," said Robert E. White Jr., president of the First Professionals Insurance Co. in Jacksonville, Fla.

Although surplus lines insurers are not subject to rate regulation, they are in a wait-and-see mode as a result of recent developments in Florida, Mr. Price said. Those changes include Florida Gov. Charlie Crist signing legislation in February to add up to $17 billion in state-backed reinsurance capacity to the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Co.

Before that, the surplus lines market "probably wrote as much business as we could get our hands on in Florida," Mr. Price said. "I see it disappearing" as a result of the legislation.

Staying disciplined

Mr. Sheehy, though, is less certain about those predictions. The catastrophe market "is very finely balanced" between those who will want to deploy capital previously allocated to Florida and those that are still wary because of the hits they took in recent years, he said.

Regardless, additional capacity is expected from two new operations in Bermuda, Mr. Maher said, though he did not provide details.

"I hope the standard market doesn't overreact," Mr. Price said. For example, there could be "a pricing battle" in the noncat portion of the marketplace. If that develops, he said he hopes regulators and rating agencies watch pricing levels and require adequate reserving.

Some sources question how long all segments of the marketplace will maintain underwriting discipline during the softening cycle, which is a chronic problem for the industry.

"So far, there is a desire to maintain underwriting discipline," Mr. Newton said. "I don't know how long it will last."

"The E&S market has many carriers who believe that it's foolish to change your underwriting stance, because the risk doesn't change," Mr. Price said.

"The incumbent markets have the discipline...but it generally fades away," Mr. Maher said. "It's a vicious cycle."

To survive the cyclical softening, the specialty lines market should draw on one of its greatest strengths--the ability to craft innovative solutions that buyers can't get from admitted insurers, sources say.

"You'll see the E&S market become more entrepreneurial," by finding new ways to write risks and new risks to write, Mr. Price said. For example, there is now coverage available that addresses the risks associated with using artificial skin in surgical procedures, he said.

Eugenie H. Shea, the Houston-based president of the medical professional liability underwriting unit of Catlin Underwriting Agency U.S. Inc., said Catlin is underwriting coverage for home health care services, although it excludes coverage for sexual misconduct or theft.

The surplus lines market can compete by being more creative, Mr. Maher said. For example, it could give a buyer better terms or funding options for financing a self-insured retention.

At this stage of the cycle, it is usually price-sensitive buyers who return to the admitted market, most sources agree.

One lure is being able to avoid the surplus lines tax, which typically is 3% to 4% of the gross written premium, Mr. Maher said.

More sophisticated buyers, however, are less concerned with cost and more concerned with protecting their risk and obtaining the services of a professional agent, Mr. Price said.

Relaxed requirements

There are several possible reasons that buyers move, including coverage, availability and pricing, Mr. Sheehy said. For most lines, he said, buyers will seek coverage first from the admitted markets because they have guaranty fund coverage.

Mr. Newton, however, said he considers guaranty fund coverage "pretty worthless" for large buyers because the funds cap recoveries and follow strict claims-filing deadlines that are too short to be useful. He said the admitted market's greater attraction is that a buyer can purchase all coverages--including general liability, workers compensation and auto--from one insurer.

The softening market also has affected terms and conditions, sources say.When there is a shortage of insurance, insurers and reinsurers seek information from buyers, Mr. Sheehy said.

"The more I know, the better your terms will be," Mr. Price said.When markets change, sellers tend to soften that requirement, Mr. Sheehy said."On catastrophe business, you are definitely getting detailed questions, but on other risks, the information requirements are less than they were a year ago," Mr. Maher said.

Other terms and conditions are being relaxed, too, Mr. Newton said. For example, it is now possible to find policies with defense costs outside, rather than inside, the limits of policies. Such terms likely increase the value of the coverage to the policyholder.

Also, it is now possible to obtain coverage for the risk of ground subsidence, which is typically excluded in most policies, he said.