Surplus Line Market: Speculations for 2006

AUTHOR: By Susan McKenna

Experts agree. The surplus lines market remains alive, healthy and stable. Who can argue with the success of this niche-based market that has risen from 4 percent in 1984 to almost 15 percent of the insurance market in 2005.

Put another way: The National Association of Pro-fessional Surplus Lines Offices’ 12th Annual Review of the industry, released in late in 2005, said the U.S. property/ casualty insurance industry has grown by approximately 375 percent over the past 20 years, while the surplus lines segment has experienced nearly a 1,400 percent increase, going from $2.4 billion in direct written premium in 1984 to $33 billion in 2004.

Despite the good news on growth, overall, some analysts are forecasting a slight hardening of the surplus lines market in 2006. Pressure on reinsurance brokers to raise premiums for admitted insurers because of the catastrophic losses of Hurricane Katrina may impact the market but many believe there will not be a dramatic change.

“The surplus line market is and always will be the safety net to fill in where the admitted insurance market can’t or won’t step in,” said Mac Wesson, president of the National Association of Professional Surplus Lines Offices. “Yet, even with the catastrophic events of 2005, and a belief that pricing may go up, it remains uncertain if the environment will change in a drastic way.”

Wesson said that other factors in addition to natural disasters will have an impact on any changes in premiums and coverages.

“The regulatory environment plays a significant role in our business. This is why NAPSLO must monitor proposals in state and federal arenas to prevent changes that could alter the freedom from rate and form filing restrictions that allow us to respond to quickly to market needs,” Wesson explained. “Legislative proposals to change the surplus regulatory environment come up all the time. Our key responsibility is to be a gate keeper for our industry.”

The NAPSLO study, prepared by A.M. Best, supports the importance of regulatory concerns for the surplus lines industry. The 12th Annual Review of the Excess and Surplus Lines Industry points out that the surplus lines market outperformed the property/casualty industry by more than 5 percentage points with a combined ratio of 92.7, compared to the 98.1 percent for the total industry. A.M. Best said the advantages of the surplus lines market lie in their ability to freely set pricing and coverage terms.

State-by-state perspective
Taking a closer look with a state-by-state comparison of the surplus lines market provides a surprising picture. A comparison of the first six months of 2004 with the first six months of 2005 the only available data shows states vary widely. California leads the rest of the states in the amount of premium generated by surplus lines companies. Texas comes in second. According Philip Ballinger, executive director of the Surplus Lines Stamping Office of Texas, major states are not necessarily seeing the same results in terms of increases and decreases in premium volume. For example, Arizona premium volume showed an increase in the first six months of 2005 over 2004 by 25.4 percent, while Illinois and Texas saw decreases of -2.5 percent and -9.1 percent, respectively. California saw an increase of 14.8 percent. Yet another major market, Florida, saw a decrease of -6.0 percent in premium for the same time period.

According to Ballinger, reporting can vary depending on how the data is collected. Clearly the industry does show stability overall, though numbers can vary from state to state, he said.

Market trends for 2006
The surplus lines market generally across the United States will continue to see surplus lines coverage by companies, large and small, for areas such as E&O, professional liability, employment related practices, D&O and more. But some speculate that one trend to expect in 2006 an increase in coverage in the allied health industry.

“As baby boomers get older, the need for more allied health care facilities will increase,” said Ted Baran, national sales manager for AVRECO Brokerage, with offices in Chicago and New York. “Competition will heat up in this area as the health care industry moves forward with a greater variety of care facilities to meet the growing needs of aging boomers.”

A description of the allied health care facilities Baran refers to are diagnostic labs, hospices, MRI centers, blood banks, in-home care, outpatient rehabilitation centers not standard hospitals or doctor liability coverages.

Baran added that because of the housing market’s continued unprecedented activity, he predicts a growth in professional liability coverage for real estate agents and subsequently the same trend will be seen for building contractors.

AVRECO President Bill Yurek believes that in other market areas, such as medical malpractice, there has been a “flattening or reduction in premiums” that he believes will continue into 2006.

“Certainly tort reform efforts, which have impacted loss experience in many states, have contributed to the stabilization of premiums for medical malpractice. In some areas premiums are going down, while others have experienced no increases in the last year. This is good news,” Yurek said.