US surplus lines market thrives in difficult market conditions

The US surplus lines market has seen the largest year-on-year premium increase for 17 years, according to AM Best. The market recorded direct premium growth of 17.5% in 2020. This followed direct premium written growth of 11.2% growth in 2018 and 2019. However, Best said that despite the excellent premium growth, the underwriting profitability of the surplus lines segment has been elusive in recent years due to losses driven by secondary perils such as wildfires and convective storms. Best said that surplus lines-focused companies – those writing more than 50% of total direct premium volume on a non-admitted basis – generated 20% growth. Regulated non-Lloyd’s alien insurers also performed well, but Lloyd’s syndicates, which account for almost 20% of surplus lines annual premium, grew only 2.8% in 2020, despite what Best called “opportunistic market conditions”. Best pointed out that Lloyd’s has been undergoing a strategic business review, implementing more conservative underwriting strategies to refine portfolios and help improve the performance of syndicates whose results had been declining. But it also noted that Lloyd’s made a strategic decision in mid-2020 to focus even more on the US surplus lines and reinsurance business “so its syndicates will continue to have a meaningful impact on the market.” The increase in surplus lines premium in 2020 was fed by accelerated rate momentum for most of the commercial P/C lines in 2019. Best said this allowed surplus lines insurers to compete for business that could be written at better prices, as many standard market insurers were seeking sizable price increases or non-renewals for riskier, non-core accounts. “Because social inflation, nuclear jury verdicts, natural catastrophes, and cyber ransomware attacks have led to adverse loss trends, carriers pushed for rate increases in umbrella and excess coverage. Insurers also began to pull back from cyber risks because of the rapidly growing number of ransomware attacks as hackers try to exploit remote work environments,” said Best. The ratings agency said this confluence of factors helped drive premium increases for the surplus lines market. Overall, Best said it expects businesses with emerging risk characteristics to continue moving from the standard market companies to surplus lines companies, generally at more adequate prices. Best’s composite of domestic professional surplus lines companies recorded a combined ratio of 99.7 in 2020, a slight 0.3-percentage-point deterioration from 2019. Operating performance was favourable, although decidedly less favourable than in 2019. The report notes that the surplus lines market traditionally performs well during times of tumult and uncertainty. Surplus lines insurer premium growth was due largely to a couple of key factors, said Best: “Opportunities attributable to market dislocation that created lower supply for the market demand; and insurers maintaining discipline despite tumultuous economic conditions and achieving a greater degree of rate adequacy per risk. In some cases, renewal carriers looked to get out of the business or risk class entirely, providing surplus lines insurers the opportunity to underwrite and price the risks in accordance with their standards.” According to the report, headwinds in 2021 include ongoing uncertainty about Covid-19 variants, earlier-than-usual significant catastrophe losses, uncertainty about casualty claims costs as courts re-open and clear their backlogs, and price adequacy concerns. For 2022, Best said it expects market conditions to remain tight. “A decline in capacity owing to changes in company risk appetites, along with hardening rates for many commercial lines of coverage, creates an environment with an acute need for creative market and product-oriented solutions – the hallmarks of the surplus lines carriers,” it said.

US surplus lines market thrives in difficult market conditions

Want to read this article?

Read Next

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Want to read this article?

Read Next

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Related Articles