Surplus Lines Report: Mostly Good News

November 15, 2021 by

A. M. Best Co. used the word stable to describe the current excess & surplus (E&S) market, which has made a turn for the better since 2020. The ratings company upgraded the market’s outlook from a negative rating, a move made because of “economic ingenuity” and the ability of carriers to generate consistent underwriting cash flow. That, coupled with stability in the claims arena and good investment management, earned the market the improved rating.

The Amwins State of the Casualty Market report for Q2 and Q3 2021 revealed similar market confidence even with hard market conditions across many lines. Amwins reported that the excess casualty market has stabilized in 2021 thanks to “abrupt adjustments made by carriers last year and new capacity entrants.”

What adjustments? They included decreasing capacity, changing attachment points, and raising rates significantly, according to Tom Dillon, national casualty practice leader for Amwins. While the market experienced a “big disruption,” Dillion also believes “without a doubt” that the situation “also created opportunity for carriers to get on accounts that they hadn’t been able to go on in the past.”

Market Overview

The disruption and adjustments set the stage for a better 2021 and beyond. According to a Fitch Ratings E&S market review released in August 2021, the E&S market enjoyed double-digit growth in direct written premiums for the third consecutive year in 2020; however, growth did not bring profitability due to substantial natural catastrophe and pandemic related incurred losses.

The Fitch report anticipates that all E&S lines, minus commercial auto, will enjoy a double-digit growth streak in direct written premiums going forward as rates and exposure showed strong growth in the first half of 2021. Fitch sees rate increases and tighter underwriting resulting in better underwriting results at break-even or better.

Brokers can also sense the movement.

“You’re seeing growth broadly across the country,” said Joel Cavaness, president of Risk Placement Services, noting that filings have increased in stamping offices in the U.S. “We’re seeing a combination of a rate increase and policy-count increase, which is obviously contributing” to the market growth within E&S, he added.

While such widespread growth is not unexpected, particularly in the hard market, what is unexpected is growth happening without some serious ratcheting down of contract terms. “We didn’t see a lot of changes in terms and conditions, with the exception of acute medical disease exclusion,” which will appear on new policies in April 2022, said Dillon. “It was more of a capacity issue.”

That seems to be counter to what is happening in the admitted market, where restrictions are sending insureds to the E&S market to fill coverage gaps, according to Brent Winans, vice president of Clear Advantage Risk Management.

Cyber coverage, he says, is an example of where there could be opportunity for some carriers. “There are some players in the market who have seized the opportunity to become experts, and to do more proactively around cyber risk management,” says Winans. Those carriers, he says, have entered the market with that approach, and are able to select good risk portfolios as a result. “That’s smart money,” he adds.

The Speed Bumps

Along with the good news coming out of E&S, there are some lines of business that are not enjoying a rosy outlook. One of these tougher lines is the security industry. Kelly Hafkey, senior sales executive for Izzo Insurance Services, said that within the armed and unarmed security risk arena, rates are up considerably.

Hafkey says her Illinois firm is one of just a handful serving the security industry. Liability rates, she says, range from a 5% increase to as much as a 50% increase, depending on the risks and the claims history. Fortunately, the higher increases are not common. “We feel the increases have been modest compared with what they had been, but across the board, we are seeing increases. Workers’ compensation rates, on the other hand, have remained about the same,” Hafkey said.

Fortunately, Hafkey believes underwriters are giving “specific attention to each client and their specific performance.” Insureds are not seeing across-the-board increases, she says, but underwriters “are looking to see who’s driving the claims.”

As with the admitted and non-admitted markets, nuclear verdicts are impacting rates and putting the onus on security firms to have legally defensible contracts, according to Hafkey. Because security is broadly defined and can include proper facility lighting, she said security firms are finding the need to clearly identify and limit the scope of work in each contract. The better the contract, she said, the better the renewal pricing.

In an unpredictable environment, the contract could be the deciding factor in court. “You don’t know what a jury will decide, and it’s a more frivolous (claims) environment,” she added. “More claims are being pursued than were a decade or two ago.”

So, too, are claims arising from heavy auto fleet, reported Dillon. Noting a billion-dollar Florida jury award in August 2021 against a trucking operation, he said underwriters are revisiting safety protocols, driver training and licensing.

Underwriters are also taking a hard look at catastrophic exposures. “Wildfire coverage is extraordinarily difficult to get today,” said Cavaness. “It’s very difficult to find insurers who are interested or willing at any price to look at California wildfire. And obviously after the last two years, Louisiana will be even more difficult” to write hurricane coverage with three hurricanes causing damage.

Some regional risks, including the New York construction market, are also putting pressure on the E&S space. Dillon said that the issues surrounding labor law in New York have made it tough for insureds to obtain adequate coverage in the state. Construction excess in general is facing rate tightening, according to the Willis Towers Watson Insurance Marketplace Realities 2021 report for the construction industry. The report predicts excess rates will trend upward anywhere from 50% to 150% and adds that contractors are experiencing “significant restrictions” in coverage.

Another risk underwriters are shying a way from: habitational exposures. Dillon said anything that includes assault and battery is difficult to place.

In particular, sexual molestation coverage “is very difficult.” One reason for this is that some states have extended the statute of limitations for civil lawsuits involving sexual abuse and molestation. New York and New Jersey, for instance, have both adopted new laws, including one-year (New York) and two-year (New Jersey) revival periods in which victims up to age 55 may bring suit against alleged abusers. California’s revival period is three years.

Everything in Moderation

Despite these tough market challenges, the E&S market overall is moderating, according to Cavaness of RPS. “Tough accounts are always going to be tough accounts,” he said. “But what we’re seeing is, instead of the shocking increases of 30% to 40%, that is beginning to moderate to much lower and more consistent increases.”

That’s in part due to what Davis Moore, vice chairman of brokerage for Amwins and president of the Wholesale and Specialty Insurance Association, said is the result of “a strong economy, increasing demand for solutions to emerging risks, and product innovation.”

That’s where E&S excels, added Moore, who believes that continual innovation and the coming up of new solutions keeps the industry thriving.

New capacity is eyeing the market as well. According to Dillon, highly regarded and trusted insurance executives are heading the new capacity, which he believes gives it more market viability. Plus, he sees other bright spots including carriers’ willingness to entertain the gig economy risks in the shared economy space; app-based technology risks, and risk in the cannabis space.

Dillon said cannabis has long been something that only a few carriers were willing to entertain. “There are carriers out there that are comfortable in the life sciences that are waiting for either cannabis to be legalized at the national level or the government creating a vehicle in which money can cross state lines,” he noted.