Surplus Lines Market Shows Growth Despite Sluggish Economy

From all accounts, the surplus lines market is alive and well in the United States despite an economy which continues to sputter in many sectors. Numbers from the Surplus Line Association (SLA) of California, Lloyd’s, and A.M. Best Co. show a market that is producing some larger than normal premiums.

SLA sees fewer policies, bigger premiums Notable increases have surfaced at the SLA during the first half of 2001. The average premium per policy in 2001 is $8,506, compared to $6,331 in 2000. The total premiums filed for the first six months of 2001 were $1,060,166,281, up 30.47 percent over last year. The item count was down from the same period last year, with SLA processing 121,629 items, down 4.01 percent.

According to SLA Executive Director Ted Pierce, “There are fewer of them [policies], but those coming in are larger.”

By comparison, the Surplus Line Association of Oregon reported total premiums of $47,538,460, with an item count of 10,539.

The top five coverages in California surplus lines for the first six months of 2001 are general liability, environmental impairment remediation, commercial difference in conditions/stand-alone earthquake, errors & omissions, and directors & officers. “General liability will always be number one because it offers very general categories,” Pierce said. “If you tried to divide up everything in general liability, you’d have a thousand categories.”

Pierce said a modest to steady increase is expected for the rest of the year unless there are more unusually large policies written in the surplus lines market. “Those are decisions which are made by large brokers and we don’t have any control over that,” Pierce said. “So necessarily, they don’t represent a trend except that they have an effect on the whole state’s surplus lines statistics.”

The SLA implemented a new transaction processing system on June 25 that will allow the SLA to produce even more specific statistics in the future.

“The technology that the old database was running on was antiquated,” Pierce explained. “We decided to collect more data, and I’d like to say this will make things simpler. Indirectly, we’re helping to protect consumers and making sure the placements by the surplus lines brokers are lawful and done with the companies on the commissioner’s approved list of surplus lines insurers. As long as [regulations] are enforced—and that’s what we are helping to do here—it will always be a lawful market.”

According to Pierce, there have not been an unusual number of unprocessed filings for the first six months of this year, but that will be the case for the remainder of the year. “Because we have a new database, it takes longer to process the brokers’ filings because we’re collecting more information.”

American market leads for Lloyd’s
Ask the ordinary businessman on the street if he has ever heard of Lloyd’s of London, and the answer would likely be “yes.” The name is a fixture in the insurance business and has been such for many decades.

Lloyd’s has 108 syndicates underwriting insurance and writes in 64 countries worldwide. Around three percent of the world’s reinsurance is placed at Lloyd’s. Sixty-two percent of Lloyd’s capital is provided by major international insurers. A.M. Best assigned Lloyd’s a secure rating of “A” and S&P assigned the market a secure rating of “A+.”

Wendy Baker, president of Lloyd’s America, noted that the company has seen a number of trends in the last year for the market Lloyd’s serves.

“At this point, the U.S. is the largest market for Lloyd’s, even surpassing the U.K.,” Baker said. “The U.S. is 35 percent of Lloyd’s income and they underwrite $5.9 billion of business in the U.S.

“Lloyd’s writes $2.5 billion of surplus lines in the U.S. I think we’ll see business has increased again when we look at this year’s figures, as more business flows from admitted into the surplus lines market. Some traditional insurers tend to have written certain businesses in the last five to seven years, and now they find they don’t want to do it anymore, so that business that was traditionally surplus lines tends in the hard market to flow back into surplus lines.”

According to Baker, the company is seeing a return of big, name brand companies putting more of their programs back into Lloyd’s.

“I think there will be an expansion as there are a number of syndicates seeking to increase their capital base and that will enable them to write more business,” Baker commented. “I think it’s driven by the economy, by loss records, by companies that don’t want to be in a certain class of business anymore and the people who are in that business, who need to buy insurance, and have a smaller window to work with to purchase insurance. That business that may have been in the retail market causes it to go to the surplus lines market and that’s where Lloyd’s is a very strong player.”

The sheer volume of Lloyds’ business rests largely in part to its ability to reach around the world, according to Baker.

“Lloyd’s has tremendous capacity to write business and also there are some pretty innovative underwriters there,” Baker noted. “What I find at Lloyd’s is ‘let’s see if we can do it.’ They try to figure a way to do it as opposed to not doing it. I think that’s a big difference and that’s why the market continues to survive.”

Some innovative coverages have certainly been written at Lloyd’s. For example, Lloyd’s has insured individuals against death or injury caused by a piece of disintegrating satellite falling from the sky; covered an insurance company in northern Australia which issues policies against crocodile attack; insured a food critic and gourmet’s taste buds, along with a whisky distiller’s nose; and insured a 20-year-old merchant navy officer sailing from Dover to Cap Gris Nez, France, in a sea-going bathtub.

A.M. Best views a strong market
As in the rest of the market, price firming has taken hold in the surplus lines segment, according to A.M. Best Co. Expectations are that firming will continue through the next 12 to 18 months as standard market insurers continue to eliminate non-core or underperforming books of business. According to senior financial analyst Ralph Cagnetta, those risks migrate back to the surplus lines market, which will be underwritten at high rates and under more restrictive terms.

“Many companies are taking advantage of the firming market by picking up business from struggling competitors,” Cagnetta said. “While this trend is expected to have a favorable impact on results, underwriting margins will continue to be pressured by rising loss costs and increasing reinsurance costs.”

According to Cagnetta, American International Group (AIG) will continue on top of the surplus lines market when 2000 results are announced, with Lloyd’s and Nationwide remaining two and three, respectively. “Both AIG and Lloyd’s command 20 percent of the U.S. excess and surplus lines in 2000,” Cagnetta said.

One company that has made a measurable gain from 1999 to 2000 is Travelers P/C Group, which jumped from twenty-third to seventh.

As Cagnetta points out, A.M. Best has the opinion that the same conditions that led the industry into a prolonged soft market—such as excess capital and too many players—still persist in the 2001 environment. “This ensures the industry’s recovery will be moderate and ensures the surplus lines industry will continue to face competitive challenges from the standard market,” Cagnetta commented.

Cagnetta added that commercial lines deregulation, a hot topic for the last two years, has quieted down this year as the Gramm-Leach-Bliley Act took center stage. Over the last year ending July 2001, only one jurisdiction enacted commercial lines deregulation (Washington, D.C.) with no additional states rejecting it.

“We acknowledge that deregulation could lead to increased competition in the surplus lines market that may depress rates and jeopardize the financial condition of some insurers,” Cagnetta noted. “However, the majority of surplus lines insurers are affiliated with larger groups, which enhances their ability to compete more effectively with admitted specialty companies.”

As Cagnetta adds, “Surplus lines writers that focus on large risks are viewed as most susceptible to losing market share, especially if the automatic export provision is missing from deregulation legislation.”

Keeping a healthy market share is what it’s all about for those surplus lines insurers who want to stay above the competition.