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Surplus lines innovation fostered by economy, catastrophes

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Current economic and market conditions and natural catastrophes, such as Hurricane Irene and the earthquake and tsunami in Japan, have steered product innovations in surplus lines insurance, often with tweaks to existing coverage.

“The surplus lines market develops products both based on needs and wants,” said James Drinkwater, property/casualty brokerage division president of AmWINS Group Inc. in New York.

As a result of Hurricane Irene in August, flood coverage is top of the list of priorities for many insurance buyers in the Northeast, Mr. Drinkwater said. Similarly, the March disaster in Japan sparked heavy interest in contingent business interruption cover.

“The markets responded,” Mr. Drinkwater said. “That's one of those things which I do think is unique about the E&S market: It is an incredibly responsive market to people's needs.”

The recent market environment has brought back some older coverage, he said. For example, when an insurer lowers the limit on a renewing policy due prior-year losses, “there is more of a demand for buffer liability,” Mr. Drinkwater said, particularly for product liability and auto liability coverage.

Buffer liability sits between the primary and excess layers of a program. For example, if the primary layer is $500,000 and the excess layer attachment point is $1 million, then a buffer layer of $500,000 is required.

While the coverage was used often in the 1980s, it has had little use since then “because there's been so much capacity and so much appetite for risk,” Mr. Drinkwater said. “It's a different strategy and a different structure, and the E&S market has been very responsive in that particular area.”

Timothy W. Turner, president and CEO of R-T Specialty L.L.C., a unit of Ryan Specialty Group L.L.C. in Chicago, said the managing general agency has devised specific products targeting regulatory developments in the food and drug industry.

ThinkRisk Underwriting Agency L.L.C., another Ryan Specialty unit, focuses on errors and omissions coverage in the converging areas of media, advertising, technology, privacy and network security. It has developed a program responding to California's Proposition 65 for food and drug labeling.

Proposition 65 requires the state of California to publish an updated list of chemicals known to cause cancer, birth defects or other reproductive harm, and requires businesses to notify consumers about significant amounts of such chemicals used in products.

The program provides advertising injury coverage for the food, drug and life sciences industries, Mr. Turner said.

R-T Specialty also developed broad coverage for the nutraceutical industry, specifically for the American Herbal Products Assn., for the products and dietary supplements that lack a Food and Drug Administration approval process.

The coverage “meets the emerging needs for product development around Proposition 65,” Mr. Turner said.

Nutraceuticals are also a growing area for Admiral Insurance Co., which has tweaked traditional coverage to meet an individual company's needs, said Bob Mescher, Cherry Hill, N.J.-based senior underwriter.

Many policies typically have an endorsement that excludes a number of product types that have been problematic because of either loss information or news reports, he said.

“Admiral has a pragmatic approach to the individual account, such that if there's a good story behind the account and the reason why they are using some ingredient, or they're paying attention particularly well to quality, then we're able to tweak that endorsement.”

Kevin M. Ottley, senior vp at 5Star Specialty Programs in Chicago, said that the Crump Group Inc. unit has focused on helping retail agents to efficiently structure and sell their new programs and services nationally.

For example, once a retail agent requests a specific coverage, 5Star handles much of the marketing, Mr. Ottley said.

“We produce for the retail agent a website portal specifically crafted for the new product,” he said.

First, 5Star devises the insurance product a particular retail agent is seeking with pricing and policy forms through binding authority on behalf of its main partners at Lloyd's of London, AXIS Capital Holdings Ltd. and Allied World Assurance Co. Holdings A.G.

“The portal can be used either in-house to help run the program within the retail agency, or we can private-label it for the retail agent to be sold directly to insureds.” Mr. Ottley said. “Although the whole site is managed and run by ourselves, it looks and feels as though it's a part of either the (insureds) or the retailers.”

The website, which offers E&O and employment liability coverage in all 50 states, can accept applications online and quote various options based on applicants' input.

The portal also accepts credit card payments, can bind policies, and emails the entire policy to the buyer within 48 hours, Mr. Ottley said.

Surplus lines products and innovation generated more than $1.5 billion in gross written premiums over the past five years for Lexington Insurance Co., said Matthew Power, Boston-based executive vp at the insurer.

“It's not only a core competency of the organization, but it's a very critical aspect of our overall income stream,” Mr. Power said.

Lexington's interactive website LexPlorations—launched in June 2010—offers a platform to examine market issues and emerging risks and “is really the genesis of new product creation at Lexington,” said Mr. Power.

“LexPlorations is a mechanism for us to have discourse with our brokers and others from the industry in order to consider topics of real change,” he said. “What we try to do is create in that space a mechanism for thought leadership and discussions on issues that are pertinent to our customer base.”

Lexington's strategy is less reactive and more deliberate, Mr. Power said.

When creating products, the specialty insurance unit of Chartis Inc. deliberately examines trends to discern emerging liabilities for its customers.

As a result, Lexington has introduced various products in the past year, such as an endorsement that allows commercial property policyholders to rebuild a damaged or destroyed property using green products; liability coverage for businesses that manufacture, distribute or use nanoparticles or nanomaterials; and an endorsement to its builders risk policy forms that is triggered solely by discovering significant archaeological resources during a construction project.