Excess and surplus lines insurance buyers are still contending with rate hikes after several years of sharply rising prices, but the pace of increases has slowed, even while more business flows into the sector.

Among lines particularly hard hit are property insurance, including Florida condominiums; cyber liability; and climate-related coverages. The ultimate effect of the COVID-19 pandemic, though, remains unknown (see related story).

Meanwhile, mergers and acquisitions activity and capital investments in the sector continue (see related story).

Surplus lines premium reported to U.S. surplus lines stamping and services offices totaled $24.04 billion in the first half of 2021, up 21.9% from the year-earlier period, the Kansas City, Missouri-based Wholesale & Specialty Insurance Association said in July.

Generally, percentage rate increases are in the high-single to mid-teen digits, said Eric Blecker, Hartford, Connecticut-based president of Northfield Excess & Surplus Lines, a Travelers Cos. Inc. unit. 

David Bresnahan, executive vice president of Berkshire Hathaway Specialty Insurance Co. in Boston, said that while the excess and surplus lines market “has settled down a bit, and the rate of change has decelerated, it’s still bumpy and at times a challenging market.” 

The surplus lines market will likely see double-digit premium growth into next year, he said.

“Right now, I’d say the market is relatively stable, coming off of two-and-a-half to three years of firming,” reductions in capacity and remediation of portfolios across the industry, said Cliff Hope, Atlanta-based head of property for Lexington Insurance Co., a unit of American International Group Inc. 

Lexington, the long-time largest surplus lines insurer, is ranked fifth-largest this year (see ranking). Lou Levinson, Lexington’s president and CEO, said in a statement in part that the insurer has “refocused the portfolio to wholesale produced middle market business in strategic pursuit of profit ahead of premium, and reducing volatility while improving margins.”

“The market is hard, and it continues to harden as we kind of muddle through this year,” with the challenges created by the pandemic and other extenuating circumstances, said Duffy Koller, Chicago-based head of AmTrust Financial Services Inc.’s excess and surplus lines business.

Rate hikes are moderating, though. “Rates are still going up, but not as substantially,” except for cyber, said Christopher J. Cavallaro, executive chairman of Jericho, New York-based wholesaler ARC Excess & Surplus LLC.

Mr. Hope said that in some cases, policyholders are increasing retentions to offset the increased pricing. 

Observers say, however, that with capacity already reduced, even with a slower rate of price hikes policyholders may be paying more for their coverage.

As is typically the case, as rates in the admitted markets tighten, more business flows into the excess and surplus market, which has freedom of rate and form, observers say. 

The changing risk appetites of admitted insurers is the predominant driver of increased surplus lines premium, said David Nelson, Scottsdale, Arizona-based senior vice president of contract and program underwriting at Nationwide Excess and Surplus.

AIG has gone through a process of moving business into Lexington in cases “where we feel it belongs,” Mr. Hope said.

“Like most of our competitors, growth has been almost unprecedented and we’re very popular right now,” said Joel Cavaness, president of Rolling Meadows, Illinois-based Risk Placement Services Inc., a  unit of Arthur J. Gallagher & Co.

“There’s been a pullback by the admitted and standard markets that’s enabled E&S to fill that void,” he said.

The excess and surplus lines market is being driven by both a shrinkage of supply and an increase in demand, said Dave Obenauer, CEO of wholesaler CRC Group in Mendham, New Jersey. 

He said the supply shrinkage is driven by losses from factors such as catastrophes, low interest rates, the pandemic and so-called social inflation resulting from higher court awards and settlements. This has led insurers to pull back capacity and to an increase in demand for excess and surplus lines coverage. 

Alex Bargmann, CEO and co-founder of Pathpoint Inc., a San Francisco-based digital excess and surplus brokerage that focuses on small account business, said, “We continue to hear from agents that say they need to go the E&S route for business they’re trying to place that they might have been able to place in the admitted market in years past.”

Meanwhile, excess and surplus lines insurers are introducing pandemic-related exclusions and sublimits.

“Everybody’s a little bit more cautious in their wordings and being more restrictive on exclusions to protect themselves,” Mr. Cavaness said.

Charts

• Largest specialty intermediaries
• Largest property/casualty wholesalers
• Largest MGAs/underwriting managers/Lloyd’s coverholders
• Largest U.S.-based surplus lines insurers
• Surplus lines premiums and taxes by state