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E&S market swells even as rate hikes ease


Excess and surplus lines insurance buyers, who have paid significantly more for their coverage over the past five years, still face higher rates, but competition is increasing and there has been some moderation in price hikes.

Despite the higher prices, business continues to flow into the sector from the admitted markets.

Experts say higher inflation, bigger jury awards, possible hurricane losses, earlier and more damaging wildfires, supply chain disruptions and courts reopening since the pandemic lockdowns are among the factors likely to have a still indeterminate impact on the sector (see story).

More difficult-to-place coverages placed in the surplus lines market include the sometimes overlapping lines of natural catastrophe risks, cyber, habitational and commercial real estate, construction — particularly in New York — transportation, auto, trucking, hospitality and senior health care. 

Meanwhile, more capital is entering the market, often through managing general underwriters and managing general agents, although some experts believe general economic concerns may slow that trend (see story).

Surplus lines premiums increased to $31.4 billion in the first half of 2022, a 32.4% increase over the same period last year, and the number of transactions increased 9.4%, according to reports by state surplus lines stamping offices.

The premium and transaction increases “are two very strong indicators that the market continues to be firm and robust across multiple lines and that more business is flowing into the channel,” said Timothy W. Turner, president of Chicago-based Ryan Specialty Group Holdings Inc. “The flow into the E&S channel is as robust as it’s ever been.” 

The move into the sector continues “because the marketplace obviously is wrestling with a lot of emerging and complex risk, and commercial carriers are continuing to rationalize their portfolios,” said Matt Dolan, Boston-based president of North America Specialty, a unit of Liberty Mutual Insurance Co.

Mr. Dolan said issues facing the market, including inflation, the threat of a recession and supply chain risks, are leading people to look for bespoke, custom-crafted risk management solutions, to which the E&S market “is uniquely qualified to respond.” 

For example, cyber “epitomizes an emergent risk dynamic and the evolving nature of risk response found in the E&S marketplace,” he said. 

The trajectory of rate increases is beginning to moderate, Mr. Dolan said, “but continuing to, in general, keep pace with projections around loss costs.” 

David Bresnahan, Boston-based chief operating officer of Berkshire Hathaway Specialty Insurance Co., said, “We are seeing some lines which are still difficult, where the rates are still double-digit, and other lines where the rates have moderated to single digits,” but the overall market is “still rate positive.”

While rates may not be increasing to the same degree as the past two or three years, Markel is getting the rate it needs to stay ahead of loss trends, said Bryan Sanders, president of U.S. insurance at the Richmond, Virginia-based insurer.

Some policyholders have seen rate reductions, said Christopher J. Cavallaro, executive chairman of Jericho, New York-based wholesaler ARC Excess & Surplus LLC.

“If you’re very difficult to underwrite to, you’re not going to see any reduction,” but successful companies will see some, he said.

Rates vary by jurisdiction, said Gary Resman, Atlanta-based vice president, U.S. casualty for Aspen Insurance Holdings Ltd., referring to E&S primary casualty. “Some will say the market is harder, while others will say it’s softening, and every region of the country has its own set of risk issues.”

But while there has been some rate moderation, lines such as property cat and cyber continue to be very tight, said Alex Bargmann, CEO and co-founder of Pathpoint Inc., a San Francisco-based digital excess and surplus brokerage that focuses on small account business.

Business continues to move into the sector, observers say. 

“The flow will continue,” said Scott Meyer, senior vice president of Chubb Group and president of Westchester Surplus Lines Insurance Co., its excess and surplus lines unit.

“Things aren’t getting any easier. Interest rates and inflation are making things more complex,” catastrophe modeling is still being worked out, and the extent to which the admitted market is becoming, in certain cases, a “little more conservative” creates more opportunities for the wholesale sector, he said. 

Most cyber liability risks are being written in the excess market, observers say. Mr. Cavallaro estimated that of the 40 markets that write cyber, 35 do so on an excess basis.

Mr. Turner said property cat risks — including wind, flood and wildfire risks — are increasingly written on a nonadmitted basis as the standard market scales back.

With the uncertainty around the economy and rate adequacy, there may be some moderation in pricing “but certainly not a market turn,” said Sabrina Hart, Atlanta-based president of Munich Re Specialty’s excess and surplus lines business.

“The market will continue to be strong through ’23,” said Alan Jay Kaufman, chairman, president and CEO of H.W. Kaufman Group in Farmington Hills, Michigan. Certain large risks will become more competitive, but those rates will flatten rather than decrease, he said.

Some observers say there are signs of a structural change in the market. There is some underlying shift in the way admitted insurers are positioning themselves not to write complicated risks. This will work in combination with the market’s traditional cyclicality, Mr. Bargmann said.


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