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Increasing rates in specific lines, a slowly improving economy and a boost in business rejected by the standard market is leading to increased revenue for excess and surplus lines insurers, while capacity remains plentiful.
The prospect is for continued increased demand for surplus lines coverage, observers say.
Meanwhile, the entry of Berkshire Hathaway Inc. has not had a significant effect on the E&S market to date, say observers (see story, page 15).
Jeremy Johnson, Boston-based president and CEO of Lexington Insurance Co., a unit of American International Group Inc., said, “We continue to maintain a positive outlook as regards the excess and surplus industry,” which “suffered a four-year decline in reduced premiums written beginning in 2007, but has grown steadily since 2011.”
Mr. Johnson said the recent growth is a function of improving economic conditions and “a diminished appetite” in the standard market to compete in lines that are traditionally viewed as E&S.
“But there's still continued pressure on industry participants” to generate a profit, “which requires a focus on underwriting discipline and risk management,” Mr. Johnson said.
Rates are increasing, but selectively, say observers.
While rates generally are rising, there are differences among specific lines, said Matt Nichols, president of Hunt Valley, Md.-based All Risks Ltd. and president of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices Ltd.
“The market remains very competitive in some areas, but we've clearly seen hardening in others,” including employment practices liability, said Ronald S. Austin, chief operating officer of Los Angeles-based wholesaler Worldwide Facilities Inc.
Furthermore, for an account with a challenging loss history, “it's clearly going to get a rate increase,” he said.
Observers noted, for instance, that under New York law, injured workers can file workers compensation and liability claims if they are injured as a result of construction falls. This has particularly affected contractors in New York City and surrounding areas.
Because of this law, New York contractors may be experiencing 30% to 40% rate increases, Christopher J. Cavallaro, managing director at Jericho, N.Y.-based wholesaler ARC Excess & Surplus L.L.C., said.
Maureen Caviston, Stamford, Conn.-based president and chief operating officer of wholesaler Partners Specialty Group L.L.C., said umbrella underwriters that previously had accepted a standard $1 million attachment point for New York-area contractors now are seeking a $2 million attachment point per accident for such business.
“At the same time, the economy has picked up and there's more construction in the area, so there's more business in the market looking for capacity,” Ms. Caviston said.
However, Alan J. Kaufman, chairman, president and CEO of Farmington Hills, Mich.-based Burns & Wilcox Ltd., said that while rates in certain pockets of the country and in certain areas of coverage have improved somewhat, they are “still way below where they were in 2005 and 2006. There are areas where rates should be higher based on experience, and they have not gone up,” he said.
“The general conditions are improving for the E&S market,” which has been the case for at least two years, said Randall G. Goss, chairman and CEO of Dallas-based wholesaler U.S. Risk Insurance Group Inc. “We're on an upward trajectory, albeit it's relatively mild in the sense that the kinds of improvements that I'm seeing are definitely mid- to low-single-digit improvements.”
Linc Trimble, Jersey City, N.J.-based executive vice president of e-commerce at Torus Insurance Holdings Ltd., which focuses on small commercial umbrella business said: “We're still seeing strong, single-digit rate increases to go along with exposure increases, which we're very happy to see because that points to an improving economy overall.”
In June, Ace Ltd. announced the establishment of a new special casualty division within Ace Westchester that will feature a wide array of primary and excess casualty products made available through wholesale and retail brokerage distribution.
In July, Ace said it was increasing its catastrophe limits from $20 million to $30 million across all its North American retail and wholesale broker-distributed commercial property lines of business.
“We are seeing an improving pricing environment in both property and casualty, which is one of the reasons we're putting more resources into the business right now,” said Bruce Kessler, Alpharetta, Ga.-based division president of Ace Westchester, Ace USA's E&S business.
Observers say an improved economy is helping lead to improved results.
Enrico Leo, vice president at rating agency Moody's Investors Service Inc. in New York, said there has been a gradual economic recovery, which has helped top-line growth, although it has been “very steady” rather than dramatic in the E&S sector.
“The economy in the United States is still in recovery mode,” and some segments are “very slowly recovering, so consequently the need for insurance has not been really accelerated,” Burns & Wilcox's Mr. Kaufman said.
At the same time, many standard line companies that had been writing E&S business “have receded somewhat” because of poor experience, which has left more business to the E&S market, Mr. Kaufman said. “As a result, our policy count has greatly accelerated.”
Capacity remains plentiful, observers say.
“There's still a ton of capacity out there, and with that capacity, you still are going to have rates that are not reflective in many cases, of where they should be,” Mr. Kaufman said.
There are some rate increases and in some cases more restrictive coverage, however, “there's still enough capacity to handle any risk,” said Mr. Cavallaro of ARC Excess.
Generally speaking, the market “remains fairly soft,” said Timothy W. Turner, Chicago-based president and CEO of R-T Specialty L.L.C, a division of the Ryan Specialty Group L.L.C.
“There's lots of capacity in most lines of business,” Mr. Turner said.
Property/casualty insurance wholesalers are beginning to enjoy the benefits of an improving economy, while investor interest in the business segment continues, observers say.