A Special Time for Specialty Markets

The specialty insurance marketplace always has been a vast laboratory for nascent products. It once was a tiny market. Those days are over. Today, with tens of billions in premiums in the U.S. market, specialty is for more than unique and emerging risks. And it is attracting new carriers and underwriting talent.

Specialty is a dynamic marketplace, evolving and overlapping in the standard property/casualty area. Today, many commercial insurance operations such as Westfield write both admitted and nonadmitted business. As specialty categories expand, there’s less distinction between standard and nonstandard lines. There’s an ebb and flow, especially in larger customer accounts. An account could show up in standard lines; other times you see it in E&S.

Over the years, specialty has been poised to jump in and provide cover, risk transfer and other mechanisms for emerging risks. As the world changes — COVID-19 and cyber-related risks are excellent examples — specialty is better equipped than standard policies to initially move into those new areas. Complex business customers require specialty kinds of coverage, and there always will be an underwriting opportunity there.

For example, directors and officers liability in the 1980s was a small business line offered by the London market and a handful of larger U.S. carriers. In 1985, the Trans Union court decision (also known as Smith v. Van Gorkom) attached liability to individual directors. That caused a panic because the typical pricing and limits weren’t adequate for the shift that was taking place. Much of the market retrenched, eventually driving a different proposition on limits usage and pricing. Today, D&O has mushroomed into a multibillion-dollar insurance product area.

Similarly, employment practices liability evolved as a new coverage for exposures that emerged from the standard casualty areas. These exposures were not underwritten and were not factored into the existing pricing models.

These days, cyber exposures are evolving at a fast and furious pace. Looking back, the first major issues were data breaches. Hackers seemed to be focused initially on large retail clients — like credit card data being stolen. Then they went into financial areas. Several large financial institutions were hacked. Then politically driven hackers outside the U.S. got involved. Now we have ransomware. You see a number of carriers developing underwriting capabilities using outside firms for doing some analysis on internal and external controls. Underwriters are deploying capital to help manage a client’s risk, and they learn, adapt, flex and change as those risks continue to evolve. Every year we gather more data and learn how to manage this risk as much as we can.

More Recent Trends

Starting in 2018, companies raised rates and limited capacity on a number of different products. This created holes in some of the larger, traditional programs in the commercial marketplace.

With this, some broker relationships have become strained with some standard P/C and specialty markets because the industry hasn’t experienced a hard market like this since 1985-1986 and 2000-2001. Many brokers need to adapt quickly as they deal with carriers reducing limits, increasing deductibles, nonrenewing lines of business and significantly increasing premiums.

The last couple of years, we’ve seen a hard market emerge in most lines, which has created an opportunity to write business at very good rates.

Today, we are still in the midst of a hard market. In certain lines, the rate increases are de-accelerating; the increases are not as high as they were through 2020 and the first part of 2021, but they’re still continuing. The property area will continue to see rate increases with weather losses still impacting carrier results. A lot of other areas, too, will see rate continuing to be pushed, but not at the same pace as last year.

Some casualty lines are hardening because of social inflation issues and gigantic awards. So, carriers have retracted or reduced limits, which created the need for a harder market with higher rates.

In short, if you look at the compounding impact of rate increases on certain product lines for three or four years, it’s a much healthier position to start with than if a carrier entered specialty back in 2013 to 2015. Thus, new carriers, new capital and new formations are making their way into the specialty segment.

In turn, underwriting talent moves as well. They gravitate to firms that are financially able to take on those risks. Stability, high financial ratings, marketplace clarity and a set of strong core values all combine to attract quality underwriters.

Building Around a Strong Culture

Westfield’s recent expansion into specialty is tied to the current hard market. But we will only enter particular lines of business where we can offer well-regarded underwriting expertise. We will initially be focused on excess positions on programs as we begin to build out our primary capabilities. We are looking to earn our way onto programs with our expertise — not undercut our way onto them.

Most successful specialty companies are more focused on profitability than they are on premium growth. The focus must truly be on underwriting profitability and providing a very stable and consistent market for business partners and customers. That’s what brokers and customers are looking for from their carrier partners.

When it comes to distributing specialty insurance, it typically has started with the larger brokers and wholesalers. Eventually, the products work their way into the standard property/casualty area through independent agents. Westfield is an underwriting-centric organization, and we believe we will fill those specialty needs for many of our valued partners in all areas of distribution.

The insurance industry offers tremendous opportunities for experienced underwriters. That is why focusing on workplace culture and business value is critical. Westfield is attracting superior talent because we aligned culture, transparency and clear communications, along with our understanding of each of the different lines of business. Underwriters want to go to a company where people are committed and working toward a common vision, and where deep expertise is valued and appreciated. They want an environment that resonates with them.

Every insurance carrier is different, but at many carriers, the culture is driven by a single individual. You see directional changes when there are management changes. A lot of it is pressure for the financial performance and continuing to look for growth. For new talent looking at Westfield, this culture is not about one person. We’ve been managing our culture for 173 years, and it will sustain us for a long time.

At Westfield, the stars are aligning. It’s a great opportunity to augment our portfolio and further strengthen our firm and achieve our vision. We’re putting the infrastructure in place for an operation with a broad brand portfolio, which deepens our expertise, helps grow our customer base and expands our presence in the P/C marketplace. And the distinct nature of the specialty market brings an aspect of diversification that will enhance our overall financial performance.

Specialty is not a short-term play for Westfield. We’ve been around since 1848, and we’re not known for being nonchalant and going in and out of lines of businesses or markets. We’re looking to add real value to the client.

From our view, it’s always an exciting time to be in the commercial insurance business, especially now.

Largent is president, CEO and board chair of Westfield, a property/casualty insurer founded in 1848 by a small group of hard-working farmers who believed in the promise of the future and the power of the individual. Largent is based in Westfield, Ohio. Kuhn is president of Westfield Specialty. He is based in Morristown, N.J.