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Limits shrink, rates harden across surplus lines market

Posted On: Oct. 1, 2019 7:00 AM CST

excess and surplus lines

A dramatic cutback in limits is leaving wholesalers scrambling to fill excess and surplus lines programs for policyholders who face higher rates in a hardening market.

While property lines were hit first and hardest due to hurricane activity over the past two years, casualty insurance buyers are also feeling the effect of the hardening market, say observers, who point to higher jury awards as a major factor.

Executives meeting at the Wholesale & Specialty Insurance Association’s Annual Marketplace in San Diego last week generally said they expect the market will remain hard for at least the next 18 months.

There was a record-breaking attendance of more than 5,000 people at the conference. More than 40% of the attendees were women, and there were more than 1,000 first-time attendees, said Joel Cavaness, president of Rolling Meadows, Illinois-based Risk Placement Services Inc., a unit of Arthur J. Gallagher & Co., and WSIA president.

“The market is obviously in a bit of a transition,” said David J. Bresnahan, Boston-based executive vice president of Berkshire Hathaway Specialty Insurance Co. “There are pockets of the market that are really distressed, and brokers are having a difficult time getting what they need for their customers now.”

“A lot of the carriers’ portfolios have been impacted the past three years, primarily in property, and the correction is happening,” said George Kotsiopoulos, New York-based senior vice president and national distribution director for Aspen Insurance Holdings Ltd. 

The cuts in limits does not signal a shortage of capacity, said Tom Jurgens, Scottsdale, Arizona-based senior vice president at Nationwide E&S/Specialty.

“There’s plenty of capacity in the market. It’s just how carriers are choosing to deploy capital,” he said. “I see it as adjusting the market to more responsible capacity levels,” he said.

The capacity “is just going to get sold in smaller chunks,” which is “probably a good thing for the market in general,” in part because policyholders are getting more insurers involved with their accounts and “are not beholden” to one insurer, said John G. Clarke, senior vice president, marketing for Richmond, Virginia-based James River Insurance Co.

The reduction in limits also means that smaller and midsize insurers can participate on more programs and have the chance to show what they can offer policyholders in terms of special insights and product development, said David Blades, senior financial analyst at Oldwick, New Jersey-based A.M. Best Co. Inc.

The reduction of limits also makes casualty lines more difficult to place, John Edack, San Francisco-based senior vice president of Arch Insurance Co.

“$25 million lead umbrellas have pretty much disappeared,” and “in many cases brokers are looking to fill their excess program with $5 or $10 million layers,” whereas a year or two ago $100 million excess capacity programs could be filled with four insurers, he said.

Observers point to higher jury verdicts, which is often referred to as social inflation, as a driver behind the hardening of the casualty market. “The social inflation that has been experienced in the casualty portfolio is going to continue moving the rates in certain areas for longer in the casualty market” than in property, said James Drinkwater, New York-based president of AmWINS Group Inc.’s brokerage division.

Severity-driven casualty lines, particularly in the transportation sector, such as businesses with heavy auto exposures, are especially affected, said Ben Johnson, Plano, Texas-based wholesale distribution executive for North America for Liberty Mutual Insurance Co. and Ironshore Inc.

“Everyone’s worried,” said Sean McPhillips, New York-based senior vice president and head of U.S. primary casualty at Aspen. 

“Losses seem to come from everywhere, so we’re all becoming cautious” about risk, with the “enormous inflation” of jury verdicts even for trip and fall cases.

“We’re seeing a huge increase in submission flow, I’m told, and that’s despite the challenges London and the Lloyd’s market faced last year,” said Ian Gormley, London-based managing director, risk solutions, for brokerage BMS Group Ltd.

The firming market is also pushing more into the excess and surplus lines market, said Marc Orloff, Boston-based senior vice president and general manager of field distribution for Liberty Mutual Insurance Co.

In addition, facultative reinsurance placements are increasing, said Susan McCaffrey, West zone lead, inland marine and related property, at Allianz Global Corporate & Specialty SE in Los Angeles. Insurers are “deciding they don’t want to assume as much exposure” in light of the last three-to-five years’ “unprecedented weather patterns,” she said.

Mr. Cavaness of RPS said increasing rates have not hit the small commercial market segment, which is seeing more low single digit rate adjustments, and “tends to trail the large market by 12 to 18 months,” although loss costs are continuing to increase.

Observers generally predict at least another 18 months of a hardening market.

For the past 10 years, the excess and surplus lines market has underpriced its products as medical trends and costs escalated, jury awards continued to increase, and trends including opioids, gun litigation and wildfire emerged, said Derek Broaddus, senior vice president, excess casualty manager, for Allied World Insurance Co.  

“All of these things coming together have exposed the E&S market as having underestimated the ultimate cost of the products we’re offering, so it’s hard to say how much correction is required right now,” he said. “We seem to be at the front end of the price correction.”

“We don’t see this as a one-year turnaround, said Mr. Orloff. “We actually see this hard market trend continuing.”

It is unclear how long hardening conditions will last, said Drew Johnson, Hartford, Connecticut-based managing director of brokerage solutions at Northfield Excess & Surplus Lines, a division of Travelers Cos. Inc. unit. “We manage our risk based on the underlying costs that we’re seeing,” he said.

“As long as the economy’s good, our business will grow,” said Alan Jay Kaufman, chairman, president and CEO of H.W. Kaufman Financial Inc., the Farmington, Hills, Michigan-based parent of wholesaler and underwriting manager Burns & Wilcox Ltd. “If the economy changes, it’ll affect it, regardless of rates.”