U.S. Surplus Lines Industry Grew Premium 17.5% in 2020

The U.S. surplus lines market experienced direct premium growth of 17.5% in 2020, the largest year-over-year premium increase since 2003, according to an AM Best report.

The 2020 increase in direct premium written comes on the heels of 11.2% growth in 2018 and 2019, according to the Best’s Market Segment Report, “Expanding Opportunities Boost Surplus Lines Growth and Spur Improved Operating Profits.”

Driving the segment’s overall growth was 20% growth by AM Best’s composite of domestic professional surplus lines companies, or those writing more than 50% of their direct business on a surplus lines basis. The composite recorded a combined ratio of 99.7 in 2020, a slight 0.3-percentage-point deterioration from 2019.

Operating performance was favorable, although decidedly less favorable than in 2019. Despite excellent premium growth, the underwriting profitability of the surplus lines segment has been elusive in recent years due to losses driven by secondary perils such as wildfires and convective storms, AM Best noted.

The report notes that the surplus lines market traditionally performs well “during times of tumult and uncertainty.” According to AM Best analysts, with sales and payrolls down because of pandemic quarantines, lockdowns and business closures, premium growth was due largely to several key factors:

• Opportunities attributable to market dislocation that created lower supply for the market demand.
• Insurers maintaining discipline despite tumultuous economic conditions and achieving a greater degree of rate adequacy per risk.
• In some cases, renewal carriers looked to get out of the business or risk class entirely, providing surplus lines insurers the opportunity to underwrite and price the risks in accordance with their standards.

According to the report, ongoing uncertainty about COVID-19 variants — their extent and length — could undo some of the progress made in the second half of 2020.

Also, earlier-than-usual significant catastrophe losses, uncertainty about casualty claims costs as courts re-open and clear their backlogs, and price adequacy concerns will be headwinds in 2021.

For 2022, AM Best said it expects market conditions to remain tight due to the ongoing impact of COVID-19, especially as infection rates in many states spike and the potential remains for more economic uncertainty.

“A decline in capacity owing to changes in company risk appetites, along with hardening rates for many commercial lines of coverage, creates an environment with an acute need for creative market and product-oriented solutions — the hallmarks of the surplus lines carriers,” the AM Best analysts wrote.