US surplus lines remain tight

A tight US excess and surplus lines market will continue to harden during the next year as admitted market insurers remain selective about the risks they are willing to underwrite and high layers of coverage in some areas stay costly and sometimes difficult to arrange, sources say. But as the tightening continues, its pace is slowing in some areas, experts agree, with rate increases tapering slightly in some classes. New capital is entering the market and may lead to slight rate relief, they add, but not to a degree that will spark a noticeable softening. Rates continue to rise, albeit at a slower pace than a year ago, sources confirm. In the excess market, insurer appetite for writing high layers is diminished and it takes more than a few to put together tall towers of coverage, they say. “What we’ve seen in the first half of 2021 are rate increases at a decelerating pace overall,” says Sam Baig, Atlanta-based executive vice-president at wholesale intermediary Amwins Group. However, he emphasises, there are “hard pockets” within many product segments, most notably in cyber liability, residential construction risks, primary and excess transportation sectors, and real estate excess/umbrella. On the property side, Mr Baig identifies risks including real estate, Florida condominiums, hospitality, frame habitational, woodworking, recycling and construction as among those hard pockets. “We’re not seeing rate decreases but we are seeing smaller increases,” says Richard Wagner, New York-based head of excess casualty at Aspen Insurance. Rate increases are not likely to go away soon, he says, as the “fundamental reasons for the increases are not abating”, and include large “nuclear verdicts”, litigation funding by investors looking to profit from settlements, and overall social inflation that drives up insurance costs. A growing market The surplus lines market showed healthy growth through the first six months of this year, with the 15 states with stamping offices reporting premiums of $24bn, a 21.9% increase from the same period in 2020. The number of transactions in those states increased 7.2% to 2.6m. “The market is strong,” says Davis Moore, president of the Kansas City, Missouri-based Wholesale & Specialty Insurance Association. The growth is coming not only from rate increases, but also from high demand for the kinds of innovative solutions the surplus lines market is known for, he adds. AM Best revised its excess and surplus lines market outlook to stable from negative in February, saying that despite Covid-19’s impact on the US economy, “the E&S segment’s ongoing profitability and premium growth signal opportunities for surplus lines carriers to successfully operate”. Market conditions are not expected to change anytime soon, says John Horton, chief market officer at Houston-based AmRisc Group, a managing general agent specialising in property catastrophe risks. “By this time next year, we are not expecting any significant softening or levelling off,” in the bulk of the company’s book of business, he says. Market attracts capital New capital has come into the surplus lines marketplace and while it may have a slight dampening effect on prices, it isn’t expected to drastically change market conditions, according to experts. Some London market insurers re-entered the property market at the beginning of the year after about 18 months on the sidelines, says Ronald Beauregard, Boynton Beach, Florida-based head of national wholesale distribution at Zurich North America, and a handful of companies have begun writing excess casualty business, some of which are based in Bermuda. “London’s re-entry into property has probably forced rates down a bit,” Mr Beauregard says. The property market “struggled to make money” in 2020 and London insurers were not aggressive on rates when they reentered, he adds. Robert Raber, director, property/casualty ratings at AM Best, says he expects to see smaller companies with about $100m in surplus entering the market later this year. Consolidation among insurers has slowed in 2021, he says, but startups are eyeing the market as attractive. The appearance of new capital from the startups isn’t likely to alter market conditions in the near term, Mr Raber says. “But if we go two years down the line and admitted carriers decide to open up their underwriting guidelines and take a lot of business back, it’s going to be a whole different ballgame,” he adds. Cost and availability plague buyers A continuing hard market is not encouraging news for insurance buyers, many of whom are cutting back on coverage limits as rates keep rising. And putting together high excess layers is not easy, sources say. Submissions for excess layers rose by 30% at Aspen, as insurers began restricting capacity in 2019 and continue to hold back, Mr Wagner says. Accounts that were put together using fewer than half a dozen insurers to build a tower in the past now need seven or eight, he explains. “What normally was a placement at $25m, we’re seeing many carriers cut that back to $15m on the higher layers,” Mr Wagner says. Accounts are routinely filled out in layers of $5m within the first $15m-$25m of excess limits for accounts that can put that much coverage together, he adds. Large casualty risks – particularly transportation and construction – that in the past bought $100m in excess coverage, are more apt to buy half or less of that amount today, says Mr Beauregard. High limits are available, “it’s just a matter of what they want to pay for those limits”, says Mr Raber. There are companies willing to write up to $100m, he adds, if a buyer is willing to pay for it. On the property side, a softening isn’t likely anytime soon, according to Mr Raber. “I think there might be a move going forward for commercial businesses to want more coverage, so there may be more demand.” “We’re growing,” Mr Horton says of AmRisc’s commercial property insurance business. E&S premiums are up 25% year on year, he points out, with about two thirds of the growth from rate increases and the remainder from coverage of new exposures. The biggest rate increases for the catastrophe specialist are in the “peak zones” of south Florida and Harris and Galveston Counties, Texas, says Mr Horton. “We write a lot of real estate and habitational business, public entity, industrial and builders’ risk.” Tough lines remain Even as rates moderate in some lines, US buyers are hard pressed to save premium dollars in others, sources agree, with cyber insurance their most notable example. “Cyber liability is in an absolutely disastrous state,” said Mr Baig. “Rates are firming daily, weekly, monthly. Carriers are under pressure to reduce capacity and the ones that are writing the exposure are scrutinising risk controls and safeguards more than ever. You see accounts that have proper controls in place still realising rate increases of 10%-30% and those that don’t seeing upwards of 100% or greater increases. For risks with limited or unacceptable safeguards and protections in place, the marketplace is viewing these as being essentially uninsurable.” Surplus lines companies are developing cyber solutions but it has to be done strategically because the exposure is large and complex, says David Blades, associate director, industry research and analytics at AM Best. “I don’t think anyone is going full bore” into covering cyber risk, he notes, “but surplus lines companies are coming to market a little more.” Financial lines are seeing double-digit increases regardless of how the accounts have performed, Mr Beauregard points out, and he expects that to continue during the next 18 to 24 months. The class of business, he says, “has been underwater for the past several years”. Transportation risks remain challenging for underwriters and buyers as large verdicts have become more common and the trend towards litigation funding has made cases harder to settle, sources note. Aspen has during the last two years tightened its approach to selecting transportation risks, says Mr Wagner, and that is a trend he has recognised among other insurers. Sources point to commercial trucking risks as particularly susceptible to big awards, which have driven up insurance costs during the last few years. Rates are up 25% to 75% for trucking companies that have been hit with large settlements, they say, and finding insurers willing to write excess layers is more difficult for troubled risks. “Excess carriers are being very, very diligent and restrictive about who they want to do business with and who they want to sit over,” on trucking risks, says Gary Flaherty, vice-president of E&S commercial auto with Nationwide Mutual Insurance in Scottsdale, Ariz. Market shows resilience The standard market is continuing to shy away from some risks, whether as a result of the disruption caused by the Covid-19 pandemic or as insurers reconsider for other reasons the kinds of business they want to keep on their books, says Mr Blades: “I think you’re seeing a pretty good time for surplus lines companies to show their value in the marketplace.” The pandemic caused standard market companies that were competing on some lines with non-admitted insurers to “take a step back” and concentrate on their core lines of business, adds Mr Blades. “The upheaval caused by the pandemic, combined with outsized property catastrophe losses and issues with some other lines of coverage gave surplus lines insurers the opportunity to demonstrate their resilience in the market,” he notes.

US surplus lines remain tight

The US excess and surplus lines market remains tight with still hardening prices and capacity restrictions, writes Michael Bradford

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