Demand Outpacing Supply in One of Best E&S Markets in 50 Years, Industry Veteran Says

The chair of W.R. Berkley Corp. has been observing conditions in the excess and surplus and specialty markets for more than five decades and views the current environment as just about the best in that time span.

According to William R. Berkley, there have only been “two, or possibly three opportunities that have looked like this” that he has witnessed during the course of his career–opportunities where “demand for [insurance] products outstripped the supply of reasoned and intelligent suppliers.”

The specialty insurance group’s chairman gave the historical perspective in September just before W. Robert Berkley, Jr., president and chief executive officer, reviewed some of the familiar drivers of the current firming market in commercial lines — the realities of a low interest rate environment, social inflation and financial inflation.

In contrast to other speakers opining on trends at the KBW event, and at virtual Reinsurance Rendez-Vous de Septembre events, the Berkleys stood out from the pack because they don’t yet see an end to hardening conditions in sight. Most others put 18 months or shorter timeframes on their favorable market forecasts and talked about decreasing levels of increasing prices.

“We think this will continue for longer than usual because of the enormous amount of uncertainty in the economy and in the financial markets. When people are unsure, that increases the likelihood of this opportunity extending for a longer period of time,” said Chairman Berkley.

He said economic conditions have created an especially strong environment for the growth of E&S business volumes. Because there are many businesses that have dramatically slowed down or closed, “there are new businesses starting or giving new birth to the old businesses, which automatically means they go into the E&S marketplace,” he said, underscoring the opportunity for surplus lines carriers. “We think it is one of the best chances we have had to get great returns,” he said.

“Brokers only have a limited amount of time,” he added, suggesting that seasoned E&S markets like W.R. Berkley Corp. are best positioned to profit in the current market. “They have to find someone they have confidence in who can analyze, underwrite and place the business. It’s not just supply and demand, but it’s knowledgeable markets that can respond promptly to brokers — because the brokers don’t want to miss the opportunity,” he said.

‘Micro-Cycles’

CEO Rob Berkley noted that economic drivers, coupled with the fact that some insurers have been revisiting their

appetites in a more disciplined manner, have been the catalysts for hard market conditions in commercial lines. Observing that “all product lines do not march together in perfect lockstep,” however, the younger Berkley said there are “micro-cycles,” meaning that different product lines are at different points of the hardening phase of the cycle.

But the industry is cyclical, he stressed. “There are some fundamental drivers that, from our perspective, have led to the hardening in the market that we’re experiencing today, [and] we do not see them eroding. In fact, we see them continuing to persist, and in some cases strengthen, which will likely lead to further firming in parts of the overall marketplace.”

“In a cyclical industry, there are moments in time when you may need to shrink. There are also moments in time, like the one we’re in now, where when the opportunity presents itself, you want to maximize that opportunity and grow as much as you responsibly can,” he said.

Inflation Continues

The specialty carrier CEO debunked the idea that financial inflation is transitory — a term he said is popular in Washington, D.C. and with the media. “Financial inflation is real …. I’m not sure what the definition of transitory is, but [inflation] certainly has been going on for quarters, and there is nothing at this stage that leads us to believe this is not going to be a reality that we are going to grapple with for some period of time going forward,” he said.

“We need to appropriately take that into consideration in how we think about our loss costs — what that means for our trends going forward ….It’s one of the reasons that we as, an organization, were out pushing for rate, earlier than some of our peers, and it’s one of the reasons why we have not wanted to move loss picks down prematurely in spite of the rate increases because those rate increases are going to get gobbled up by certain types of inflation — financial or social ….

“Our assumption is inflation is real. It rears its head in a variety of different ways. There is no question that, quite frankly, the costs of products, good, services today are by and large more today than they were yesterday. And we expect that trend will continue. And we need to obviously be responding to what does that mean for our claims costs and other costs and how we assess that in our pricing.

At a later KBW conference session, Peter Zaffino, president and CEO of AIG, talked about the transformation of AIG’s E&S unit Lexington Insurance, and what he views as AIG’s leadership in driving rate. At the same time, he cautioned KBW Analyst Meyer Shield against assuming that decelerating rate hikes — being reported by some market players now and projected by others on the near-term horizon — are necessarily a signal of eroding E&S profit margins. The key to continued underwriting profit is that rate jumps outpace loss cost inflation, he said.

“If you call decelerating rates — meaning I’m getting less of an absolute rate increase this year compared to last year — a bad thing, then I want to reshape that [view]. I think it’s a good thing because we want to shape the portfolio we want. If you just chase absolute rate in a market that starts to go down, you end up getting a less-than-desirable portfolio….

“We want to make sure that we’re retaining clients, we’re getting rate above loss cost inflation, social inflation. We’re repositioning the book because we’re constantly pruning. And we’re also using [our] lead underwriting capabilities to drive outcomes.

“We weren’t relying on others to shape the rate environment that we wanted to drive for our portfolio” transformation, he said, noting that the repositioned AIG E&S book is now growing.

“We’re not a capacity player that just follows other leads …We want to shape the direction of terms and conditions. We want to shape the direction of how we’re underwriting. And I think that leadership has yielded rate increases, but equally repositioning of the underwriting portfolio,” Zaffino said.

Later, referring to AIG’s market position competing with a small field of large global lead underwriters rather than new capacity players entering the market to fill in “some of the commoditized layers,” Zaffino concluded: “I think the market we’re in is the market that needs to continue for a while. And we are comfortable that we will continue to lead in driving rate above loss cost, driving margin.”

E&S Property: Searching For Profit

At an earlier session, Joseph Brandon, president of Alleghany Corp., assessed the state of the market, viewed from the perspectives of Alleghany’s RSUI, a bigger player in the E&S property than casualty space, and CapSpecialty, a writer of professional liability, health care and specialty casualty.

Questioned by KBW Analyst Richard Cagney about the impact of the pandemic on specialty lines premium volumes, Brandon noted an influx of submissions. “RSUI and CapSpecialty have not missed a beat in the transition of work from office to work from office. We did not see a noticeable dip in production trends,” he said. For RSUI, “the feedback has been very positive in terms of speed of response, quoting, being helpful through a period of time when the wholesale market has received a substantial increase in submissions as standard markets have pulled back and re-underwritten certain risks.”

“Some of RSUI’s lines of business are in the 16 or 17th quarter of rate increase, obviously starting out much slower and ramping up to double-digits,” he said, reporting strong flows of business in management liability, professionally liability, umbrella and property.

“Now, some of the rate increases are off their peak but I think it would have been silly to assume they would go up at an increasing rate of speed forever. They’ve kind of rolled over but the rate increases that we’re getting, we believe are in excess of trend and we’re adding to the margin of the book of business.”

In the prerecorded session, which Brandon revealed actually took place within eight hours of landfall of Hurricane Ida, he focused in on the property line. “In truth, we have not made a nickel of property underwriting profits on a cumulative basis in the last five years. So, despite everybody talking about favorable property rates, we don’t have the underwriting profits that show it. That’s true at the reinsurance level, and that’s true at the E&S level,” he said.

“Anybody who thinks rate increases the industry is getting aren’t justified, I think doesn’t have an appreciation of what the industry has gone through in the last five years in terms of losses. And I don’t think we’re the exception. I don’t think there’s any smart money in the property business these days. I think anybody who has been writing this business for five years has probably lost money, and at best, they made a little money but the returns on capital are unattractive for this risk. … “We’re now coming up on the fifth year of frequency of $10-20 billion events around the world. Maybe it’s climate change. Maybe it’s just a tough patch. But the industry has got to charge more for these risks,” he said.