Surplus Carriers Search for Growth Never Ends

In 2013, net income more than doubled from the $1.57 billion reported in 2012, according to the “2013 U.S. Surplus Lines Market Review” published by A.M. Best.

Not resting on their laurels, surplus lines carriers are continuing to target traditional as well as new product areas where they can grow, from cyber to construction.

Jeremy Johnson, president of surplus lines carrier Lexington Insurance, an AIG subsidiary, told Insurance Journal that the diversity in Lexington’s overall portfolio enables it to commit to lines of business even when “the market environment is more challenging than we’d like it to be.”

“We grew the portfolios that we wanted to grow and we were very pleased with the results,” he said speaking of his company’s most recent performance.

For example, Lexington launched a first-of-its-kind coverage for unmanned aerial systems or unmanned aerial vehicles “that’s getting a huge amount of interest,” Johnson said.

Specialty coverages such as historical tax credit and residual value insurance are also performing well, he said.

Cyber-related coverage is one area of the market ripe with opportunity.

According to Hank Haldeman, executive vice president of The Sullivan Group, and incoming president of the National Association of Professional Surplus Lines Offices (NAPSLO), the tech and cyber markets show tremendous opportunity for growth, in particular data breach and privacy exposures.

“We are finally seeing some traction across the board in cyber, which is being led by the healthcare industry,” Haldeman said. “But also other industries are waking up to the fact that they have significant cyber-related exposures, as well.”

Haldeman said the surplus lines industry has led the way in creating a market to cover cyber-related exposures. “The market is really starting to move with more robust covers coming out from a greater number of insurers,” he said.

For Lexington, cyber coverage has been a focus area for some time, Johnson said.

“Cyber is a real focus area for our brokers and customers, and for us,” he said. “We think that the U.S. market is approximately $1 billion today and will expand to as much as $5 billion in the relatively short-term. It’s a dynamic and changing area of risk management,” Johnson said. “We certainly see that as a hot area.”

The construction segment continues to show promise for Lexington also. “Construction continues to improve as our economy continues to improve and we are certainly seeing that come through in our book,” Johnson said.

For Lexington, transportation is still a good market. “Transportation, which is another bellwether industry, continues to show good growth,” Johnson said.

Haldeman’s wholesale brokerage firm has also seen an uptick in its construction business, although it recently has had a less positive experience with transportation, where Haldeman said there has been “an increasing number of carriers really struggling with the transportation business” including commercial auto and long haul trucking.

“A number of carriers have changed their appetite or withdrawn from the market entirely,” he said.

Haldeman said that rates are going up in the employment practices liability market while the property catastrophe market is undergoing change. “Catastrophe-exposed property is seeing downward pressure coming from the reinsurance market,” Haldeman said.

The current surplus lines price environment reminds Johnson of last year’s.

“Generally speaking, our rates are not dissimilar from this time a year ago,” Johnson said. “However, some parts of the property market are experiencing intense competition, and I question whether the returns on some insurers’ and reinsurers’ portfolios will be adequate for the long term.”

The low interest rate environment is a real challenge for smaller insurers that may be heavily dependent on reinsurance for capacity, Johnson said.