The US surplus lines market grew by 11.2% in 2019, the second year of double-digit premium growth in a row, according to AM Best. It said the growth was driven by hardening market conditions and the growing complexity of risks sparked by new technologies in different industries. The growth has continued in the first half of 2020.
According to Best, the hardening market conditions had a distinct impact on unique, higher-risk-profile accounts, generally requiring specialised or surplus lines treatment. Rate increases for most commercial lines increased from low single digits (2%-3%) in early 2019 to low double digits (10%-11%) from the second quarter of 2019 through the end of the year, and have maintained that momentum in 2020, said the ratings agency.
Best said that its composite of domestic professional surplus lines insurers (those that write more than 50% of their business on a non-admitted basis) recorded a combined ratio of 99.4 in 2019, a 5.1 percentage point improvement over 2018.
“The majority of early Covid-19 losses so far are incurred but not reported losses, as opposed to paid or case-incurred losses,” said Robert Raber, associate director, AM Best. “Although loss frequency for some lines of business such as private passenger auto and commercial auto has declined due to the pandemic, frequency trends are likely to return to prior levels when conditions allow the economy to bounce back to pre-pandemic levels.”
Best noted that the improvement in the composite’s annual loss ratio reflects the positive impact of recent average pricing increases in most lines, along with a more benign catastrophe year in 2019. “The shift of business from admitted to non-admitted insurers is typical of harder markets, when admitted insurers take a more conservative approach to accounts with higher risk profiles,” said David Blades, associate director, AM Best industry research and analytics. “This results in business flowing to surplus lines insurers, with the opportunity to write at more favourable rates and coverage terms.”
Surplus lines companies have been able to continue growing premium despite the Covid-19 pandemic, according to indications through the first half of 2020. However, Best explained that the expected contraction in exposures led to it revising its market segment outlook on the US excess and surplus lines segment to negative in April. “For some carriers, the contraction has since created a shrinking underwriting cashflow, shifting claims frequency-severity trends and a challenging investment market. In addition, carriers could be subject to coverage creep, which state legislatures are already attempting to address with regard to business interruption claims,” said Best.