E&S market ready for some uncertainty
Some price hardening possible due to hurricanes; new opportunities seen in housing and health care markets
Experts agree. The surplus lines market remains alive, healthy and stable. Few argue with the success of this niche-based market that has risen from four percent in 1984 to almost 15 percent of the insurance market in 2005.
Put another way: the National Association of Professional Surplus Lines Offices’ 12th Annual Review of the industry, released in late in 2005, said the U.S. property casualty industry has grown by approximately 375 percent since 1984, while the surplus lines segment has experienced nearly a 1,400 percent increase, going from $2.4 billion 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 would have an impact on any changes in premiums and coverages.
Regulatory environment
“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 said.
“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 12 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, shows states vary widely. According Philip Ballinger, executive director of the Stamping Office in Texas, major states are not necessarily showing the same results. 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 a 9.1 percent respectively. California saw an increase of 14.8 percent, yet another major market, Florida, saw a 6.0 percent decline in premium for the same time period.
According to Ballinger, even though reporting can vary depending on how the data is collected and numbers can vary from state to state, the industry does demonsrtate stability overall.
Aging baby boomers
The surplus lines market across the U.S. will see the traditional surplus lines market coverage by companies, large and small, such as E &O, professional liability, employment related practices, D & O and more. But some like to speculate about what new trends to expect in 2006 and one is 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.”
The allied health care facilities Baran refers to include diagnostic labs, hospices, MRI centers, blood banks, in-home care, outpatient rehabilitation centers–not standard hospitals or doctor liability coverages.
Baran also believes that the housing market’s continued unprecedented activity will present opportunities for brokers. He predicts a growth in professional liability coverage for real estate agents and similar trends in the market for building contractors.
Stabilizing medicine
AVRECO President Bill Yurek believes that in other market areas such as medical malpractice, the market has seen 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.