How New Business Is Creating a New Wholesaler-Retailer Relationship

An influx of new business is presenting surplus lines wholesalers and their retail partners with new opportunities to work together even as other forces are changing how they work together.

The surplus lines insurance market continues to grow, not because rates are rising, but because there is new business from the booming economy.

The surplus lines market is also benefitting from other carriers’ “in-the-box” underwriting that closes out risks that the surplus lines market is happy to accept.

In 2017, the surplus lines market grew by 5.8 percent (to $44.9 billion) on a year-over-year basis, compared with less than 3 percent growth in 2016 and 2015, according A.M. Best.

“In 2017, surplus lines and specialty market insurers continued to demonstrate the resilience that has been among their defining characteristics,” says David Blade, senior industry analyst – Industry Research & Analytics, for A.M. Best, and co-author of the 2018 A.M. Best Surplus Lines Segment annual review.

Despite weather related losses, the composite of surplus lines insurers A.M. Best follows was still able to generate both pretax and net profits and maintain strong overall balance sheet strength, Blades said.

A.M. Best has a “stable” outlook for the surplus lines market and believes that it should remain financially sound for the foreseeable future.

“The report continues to provide A.M. Best’s perspective on the state of the market and the relative positions of carriers in the market, and its analysis of the surplus lines sector’s financial condition and market trends, which are all strong,” said Brady Kelley, executive director of the Wholesale & Specialty Insurance Association. “It is rewarding to see our market hit another record level this year.”

That outlook remains stable even though, as market participants note, rates are not going up.

“The market hasn’t changed much from last year at this time; the market is flat as far as rates go,” said Alan Jay Kaufman, chairman, president and CEO, H.W. Kaufman Financial Group/Burns & Wilcox. “There’s only a few areas where rates have changed a little bit, like transportation for instance.”

But there is plenty of new business to make up for the fact that rates on existing business are flat. Some of the business is coming from admitted carriers and some is coming from the improved economy.

“The business opportunities have expanded because of the U.S. economy in particular,” Kaufman said. “With the stronger economy there’s been a real opportunity for us to grow, and to expand.”

Kaufman said he hasn’t seen massive pullbacks from standard companies writing business – the “normal” trend seen when the specialty market grows. “It’s because there’s more business to write because the economy’s stronger.”

But others see business moving from the standard market into the surplus lines market as a key part of the growth.

“The market’s moving, it’s migrating, there’s new business coming into the channel at a higher rate than it is leaving the channel,” believes Timothy Turner, chairman and CEO of R-T Specialty.

Turner admits that it’s hard to measure how much of the new business is coming directly from the standard market.

“That number is always an estimate and very hard to gauge when it’s going up or down. But the non-admitted P/C market is very accurately predictable in terms of when it’s moving up or down – and it’s moving up. It’s billions of dollars of business moving into the channel,” Turner said.

Turner noted A.M. Best, which tracks the 50 states’ surplus lines tax filings, found that the percentage of non-admitted business in the surplus lines channel has been around 10.3 percent for eight or nine years, and just moved to 11.1 percent in the second quarter. “That’s a lot of movement,” Turner said.

He thinks the movement is indicative of what’s called “dumping” — which is where standard companies nudge their non-renewals into the surplus lines market. Turner sees carriers currently doing this with unprofitable real estate business, in particular, especially habitational risks.

“There’s probably, a little bit of London non-renewals contributing to the trend as well,” he added.

Once the “dumping” trend begins, the surplus lines market can count on it continuing in his experience. “It is not something that just goes up one month and then stops. It usually starts moving and it continues to move,” Turner said.

He also sees growth in the construction industry as a big contributor to surplus lines.

“There are massive amounts of infrastructure construction coming into the channel,” Turner said. “That includes high rises, bridges, tunnels, dams, airports, all that is on the increase in a big way, and measurable.”

Auditioning for Business

In addition to bringing new business for surplus lines brokers, the strong U.S. economy has also contributed to changing how some brokers do business.

“It has provided us with greater opportunities to write more business, and to be more selective on what business we’re writing,” said Kaufman. “Selective not only in the sense of experience from underwriting, but also the fact that we can be selective on what business with better margins we can spend more time attracting to our company.”

With rates flat and the cost of doing business rising, brokers are becoming more efficient at selling products with better profit margins. “I think some of the best people in our business are doing that, and we have to continue our top line sales because our bottom line is not going up correspondingly. … So, everybody has to be more productive, more selective, throughout the whole food chain,” he said.

Brokers must continue to be selective because rates aren’t going up anytime soon. Kaufman says insurers are fighting “tooth and nail” to keep lowering rates. “They’re commoditizing insurance at all levels. They’re writing at losses,” he said. “That will change someday, but it hasn’t, and with the great capacity in the insurance world today, we’re going to see a prolonged period of very low rates.”

Turner notes that in addition to dealing with a market that won’t hike rates, surplus brokers are dealing with retail agencies that are altering how they buy surplus lines.

“The retailers themselves, not just the big ones, but all the top 100 retailers are buying from wholesalers differently. It’s a lot more sophisticated. It’s a lot more [request-for-proposal]-oriented. It’s a lot more specialty driven,” Turner explained.

He said the process has become like an “audition” for the business.

“Wholesalers have to ‘win’ the business at a macro level. It’s no longer just, ‘He’s my buddy and we’re going to do business together.’ And the winners are companies with practice groups, verticals, that can elevate and increase the execution of the transaction repeatedly,” Turner said.

If how retail agents approach surplus lines brokers is changing, it is partly because the role they see surplus lines playing is itself changing.

While excess and surplus lines markets are often viewed as “a market of last resort,” that traditional view is changing as they are also often the best and only markets available for emerging exposures and/or extremely challenging risks.

That’s according to Bobbie Duke, mentor for INSURICA University.

Duke said that the surplus lines market, in particular with property insurance, has grown into a helpful provider of coverage as many standard markets tighten their belts in recent years. “As standard markets escalated their deductibles for wind/hail due to losses, the surplus lines markets offered better terms and lower deductibles,” she said.

James Keane, vice president of SIAA MarketFinder, agrees. “As we’re seeing some standard line companies become more ‘in the box with the underwriting, we’re seeing wholesalers and the E&S market pick up those lines of business.”

According to Keane, that’s leading to better relationships between retailers and their wholesaler partners.

Keane also agrees that many agents have moved beyond the “market of last resort” mentality when discussing the E&S market.

“Obviously, it happens. Every agency has something that’s declined or gets non-renewed, so they definitely rely on the market for those accounts,” he said.

“We’re seeing more instances where business is getting driven to E&S because of one characteristic of one risk,” according to Keane.

That might include an everyday restaurant account, where the entire risk fits into a standard line market, except the liquor sales.

“So, just the liquor component is going out to E&S,” he added.