With direct premium written growing at 11.2 percent and surpassing the $50 billion mark, the surplus lines market segment set a new record in 2019, according to Best’s 27th Market Segment Report: Expanding Opportunities Bolster Surplus Lines Growth and Operating Results. The second year of double-digit growth was driven by a hardening market and increased complexity of risks, according to AM Best.
After the onset of the coronavirus pandemic, the surplus lines market’s resilience during the first half of 2020 was somewhat surprising to AM Best, which had revised the segment’s outlook to negative during the first quarter this year. As it is, the surplus lines market has demonstrated its resilience in 2020 against adverse conditions.
Last year was the surplus lines segment’s eighth year of sustained growth; the segment has grown 78 percent since it was last down in 2011, said Brady Kelley, executive director of the Wholesale and Specialty Insurance Association. For the first time, surplus lines direct premium went above $55 billion, he said, demonstrating an increased demand for wholesale products.
The report card on the surplus lines segment “couldn’t look better in our minds,” Kelley said in leading off the panelists’ discussion at a webinar hosted by AM Best on Sept. 10. Even though the webinar was not part of the WSIA virtual annual Marketplace platform, the webinar, sponsored by Lexington Insurance Company and the WSIA Foundation, was held at the inception of the WSIA Marketplace which ran through Sept. 17.
In addition to Kelley, panelists were Marya J. Propis, senior vice president, distribution and broker partnership at RT Specialty; David Blades, associate director, industry research and analytics, AM Best; Lou Levinson, president and CEO, Lexington Insurance Company; James Drinkwater, president, AmWINS and AmWINS Brokerage; Bryan Sanders, president, Markel Specialty and WSIA 2020-21 president, and Jacque Schaendorf, president and CEO, Insurance House, and 2018-19 WSIA president. The panel was moderated by John Weber, AM Best, who prefaced his introduction of the panelists by saying the opinions of the panelists are theirs.
Kelley said that the U.S. surplus lines stamping and service offices reported 10.3 percent growth for the first six months of 2020 as compared to the first six months of 2019.
The 15 states with stamping offices account for 62.7 percent of the U.S. surplus lines premium, according to the stamping offices’ 2020 midyear report, so they are a strong indicator of the market. The stamping offices reported 12.7 percent growth at midyear 2019.
The good news is that these offices reported growth through 2020 despite the economic challenges and other market disruptions, such as COVID-19, Kelley said.
Many WSIA members are optimistic about double-digit growth continuing through 2020 and into 2021, he said.
E&S market performance is strong
Blades, who worked on the Best Market Segment report, described the momentum coming into 2020 as “striking.”
In our rating meetings, companies emphasized the wealth of opportunities they are seeing from their broker partners and other intermediaries.
At a time when many of the commercial lines coverages that surplus lines companies write are yielding better pricing on average, the prevailing opportunities are also allowing companies to construct programs written at terms and conditions adequate for the risk being insured, which is important for overall solid market dynamics continuing through the second half of 2020, Blades said.
The domestic professional surplus lines companies grew year-over-year by the largest percent since 2006, with 14.7 percent growth in 2019. The overall surplus lines market would have grown more, but for the more modest growth of Lloyd’s of 6.1 percent, year-over-year, Blades observed.
He attributed Lloyd’s lower growth to the Lloyd’s market ridding portfolios of business that fails to meet profitability requirements as part of Lloyd’s strategic business review.
While growth is noteworthy, Blades said, it is just part of the story. He trumpeted the “strong performance” of the surplus lines market, saying it is “impressive.” From Blades perspective, producing strong profit is also noteworthy. On average the top 25 companies, in terms of annual direct premiums written, generated a much higher year-over-year growth in comparison to the overall P/C industry, and generated a solid combined ratio and higher pretax return on revenue. The average combined ratio for these surplus lines companies is slightly above the overall P/C industry’s, but is still very solid, Blades said. They generated favorable results while growing during the 2019 calendar year.
The domestic professional surplus lines insurers continue to maintain a higher percent of secure ratings than the overall property/casualty industry. Through mid-year 2020, 100 percent of surplus lines companies maintained secure ratings, compared to 96.9 percent for the total property/casualty industry, Blades reported.
2020 Market Segment Report
According to Best’s sector report, there were no financial impairments in the surplus lines segment, which contrasts with 13 admitted property/casualty impairments in 2019. Since 2013, AM Best has reported one surplus lines company impairment, compared to the admitted property/casualty industry’s 252 impairments.
Despite numerous economic, regulatory, legislative and market challenges, the report states, surplus lines insurers’ market share has more than doubled in the past 20 years, from 3.6 percent of total property/casualty direct premiums written in 2000 to 7.8 percent at the end of 2019. As a percent of commercial lines direct premiums written, surplus lines grew from 7.1 percent to 16.2 percent over the same period.
This year is different
What is different this year, according to Blades, is COVID-19. The pandemic is the biggest outside element the surplus lines segment has to deal with. It has impacted the industry in general and the surplus lines market in particular, as well as all elements of daily life, including healthcare, the national markets and the economy.
While economic indicators rebounded in June, July and through August from the initial March and April market contraction owing to the pandemic, a new surge of cases around the country has threatened to stunt the economic recovery, Blades said.
Best is still aggregating second quarter financial data. Top line premium for the overall market is expected to be impacted; however, surplus lines premium increased during the first quarter, and based on indications so far, Best expects the surplus lines premium to grow through the second quarter, Blades said. Despite the headwinds, Best expects growth throughout the rest of the year because of the opportunities that are still plentiful to write surplus lines business.
According to Blades, the shelter-in-place mandates and government ordered business closures may help yield improved profitability, but “the business interruption argument is still being played out,” and it is not clear how COVID-19 will impact specific lines of coverage.
New in the report, according to Blades is information on climate change and how that impacts insurance companies. “We also talk about the D&O market and the opportunities available there.”
Prior to the pandemic, AM Best maintained a stable outlook for the surplus lines sector, believing the market would maintain favorable growth and underwriting performance because of capital and the surplus lines companies’ core competencies, Blades explained. After the pandemic began to be felt countrywide, AM Best moved to revise its outlook from stable to negative in early April. “That decision directly reflected economic disruption in the U.S. stemming from the COVID-19 pandemic,” Blades said, and the effect AM Best expected the contraction of the economy to have on the market. According to Blades, AM Best believes there is a direct link between a healthy economy and the demand for surplus lines insurance products, particularly for new and emerging markets.
“Best has been somewhat surprised just how resilient the surplus lines market segment has proven to be with these headwinds,” Blades said. Best plans to see how things play out through the rest of 2020 and update its outlook in early 2021, he said.
The sector responds to COVID
“The industry gets really high marks for the way we responded to the pandemic,” Levinson said. “First and foremost we showed up with humility and compassion. We supported our communities, charities and employees at a time when they needed it the most. We remained responsive to our customers. We kept our doors open. We answered our phones. We issued quotes and bound business. We paid claims. And as an industry we did what we do best – we kept businesses in business. . We proved we could work effectively from home in a difficult and dynamic environment. Technology needed to show up in a big way, and it did. Most companies came through it pretty well.”
Nonetheless, Levinson believes people are ready to move on. “We are ready to hear less about Zoom calls and virtual happy hours and more about returning to the office.”
Rates have been affected
What was going on pre-COVID – social inflation; the low interest rate environment; the natural disasters, such as wildfires, quakes, floods, and hurricanes, and a prolonged period of softer rates – caused the market to tighten. Those conditions still exist, and the pandemic has “reinforced” those situations, Sanders said. It creates uncertainty, and those market conditions, if not the pandemic, will exist for a while.
Sanders believes that the increased rates are not across all product lines, not in every geography and not in every class of business, but for those impacted it has been significant.
Recent M&A activity
Propis opined that M&A activity has been impactful for the “retail channel” as well as “the wholesale channel.” From an M&A perspective, she said, “we all know our clients’ needs have grown exponentially. The world is a far riskier place. One of the things mergers and acquisitions enable us to do is continue to be nimble and innovate, find solutions and create differentiated products.”
Propis believes that M&A has affected the wholesale channel positively overall, and she talked about the recent merger of Ryan Specialty Group and All Risks Ltd.
For any recent M&A merger, culture really becomes a key factor, she observed.
The impact of technology
“We’re not going to be disintermediated by any technology whatsoever,” Schaendorf commented. Technology “is our opportunity to advance and improve our customer experience between all channel partners.”
Despite the pandemic, she said, because of the investment in insurtech, the surplus lines sector is “set up well” to handle “what has happened to us.” According to Schaendorf, $7 billion has been invested in the insurtech space over the last six or seven years.
For the broader insurance sector, insurtech impacts every area throughout the insurance buying cycle, from customer distribution, to policy, claims, billing, data and analytics. For the E&S sector, the main immediate impact is in digital platform development around core policy administration systems and claims systems – all designed to create an ease of use factor between channel partners for the “efficient exchange of data and information,” Schaendorf said.
“Data science is becoming a big deal throughout the industry and within our sector,” she said.
The WSIA Insurtech Committee is planning its annual conference for next year and is working on content to create awareness among executives in the industry about the impact of insurtech across the E&S sector. The committee is working on “showcasing the traditional versus transformational technology and the impact of third-party data, risk assessment and data prefill throughout the distribution channel, more accuracy in underwriting and pricing, opportunities to create product, artificial intelligence and machine learning,” she said.
Companies respond to working at home
Levinson gives the industry high marks “for the way we transformed into Google overnight. Who knew we could do such a thing? We are succeeding in spite of having to operate with one arm tied behind our backs. We are a resilient bunch. We maintained a cohesive and engaged workforce that is driving the highest domestic growth since 2012 in the middle of the pandemic, a presidential election and murder hornets. It’s not easy.”
Human interactions are at the heart of the insurance industry, Levinson said. “Relationships matter. COVID has robbed us of the social interaction that drives so many of us. Working from home does take a mental, spiritual and emotional toll,” Levinson said. Some of the ways his company is countering those effects are frequent and constant open communication from the top down, daily video calls, check-ins with staff at every level, encouraging folks to take care of themselves, take time off. “We have learned a lot. . Our leadership team is stronger than ever. After 126 daily Zoom calls, we have no secrets.”
Investing in the future matters, Levinson said. “AIG kept its promise to 50 interns last summer and delivered a virtual internship experience that is shaping up to be our most successful training program ever.”
Impact of hurricanes on the industry
Drinkwater agreed that the industry is resilient and dynamic. He remarked that Hurricane Laura was the first Category 4 storm to hit land since Betsy in 1965. The devastation in Louisiana reminds one of the “unpredictability of these storms,” he said. While it was a large storm, the insurable impact of Laura was not that great in the grand scheme of things. “These type of events make me feel that this market is going to be upon us for a significant period of time,” Drinkwater said.
Terms and capacity
Typical of any firming market, Sanders said, terms and conditions are tightening quite a bit. Capacity is more limited than in recent years, and limits exposed are being carefully managed.
He has not seen a lot of firm markets during his career. “We are probably more expert in softer conditions,” even though the market has been firming for the better part of two years.
Capital was “really restrained” at the beginning of the year, but recently, more capital is coming in. On the carrier side, he is starting to see new entrants come into the market, even some firms from offshore. He has also seen some capital coming in on the distribution side. The situation is “dynamic and ever evolving.”
As a broker, Drinkwater is encouraged by new entrants, but does not see “an enormous” amount of capital coming into the market – not enough to change the market environment.
Where are the opportunities?
Levinson sees opportunities “everywhere.” He mentioned filling holes in excess cat property programs, challenging liability programs, miscellaneous healthcare business, middle market A&E, builders’ risk, management liability and “all over” in the contract space, including some of the smaller broker business. Risks are priced stronger than a year or two ago; deductibles are improving as clients retain more appropriate levels of risk, and the industry is becoming better stewards of capital and capacity to manage unprecedented volatility.
Business is falling into the E&S space at an unprecedented pace, Levinson said, allowing wholesalers to prove their value and E&S carriers to provide innovative solutions to complex problems in a very thoughtful way. As these accounts flow into the market, the industry is ready to offer solutions. “We need to be responsive with a breadth of products, deep underwriting expertise, bench strength and strong broker relationships. We need to have underwriting courage and discipline using freedom of rate and form to carefully manage risk. We need to be able to solve problems from Main Street to Wall Street because they come in every flavor.”
One of the silver linings Sanders noted is that working from home has made people more available and interested in getting deals done. “When we were traveling, people were tougher to get hold of. .Now people are more available.”
Another silver lining, according to Sanders, is being able to track business coming in. Business is probably a little off on SME, he said, but on an overall basis submission flow is opportunistic.
Drinkwater said AmWINS has seen submissions increase by double digits. There is the “murders’ row”: New York City construction, excess transportation, real estate, catastrophe, D&O. It is not limited geographically and not by product. He sees the market “from a wholesale broker’s perspective, as a “very exciting time. Opportunities are coming from all over.”
Client expectations changing
Our trading partners and customers always value a financially stable market and one that is willing and available to pay valid claims as they become owed, Sanders said. He sees increased demand from trading partners for various capabilities, not just for traditional insurance solutions, but also program facilities, fronting capabilities and ILS capital. “Not many are able to provide all that under one roof,” he said, but Markel is.
Trading partners and customers value speed and efficiency of getting our products to them, Sanders said, and being available and being able to respond. “We know that many times the first quote in wins the deal, so we focus on that quite a bit.”
Carriers relationship with wholesalers
Propis believes that the relationship between carriers and wholesalers can make or break a wholesaler’s position with retailers.
According to Propis, the carriers that are focused on the wholesale channel need to make sure that they are staffed with the right talent and with the right operating model to manage the high volume of submissions and deals and that their underwriters understand the value proposition and embrace the role of a broker.
She emphasized carriers having “a deep bench and the capability to handle an increased flow of submissions,” which requires efficient quoting, binding and processing efforts. She sees the carrier/wholesaler relationship as being more critical than the standard market interaction between agents and companies. “We have to deliver seamlessly to our retail clients,” she said of brokers in the E&S distribution channel.
As a broker, what she expects and embraces from carriers is “clarity of appetite and a clear view of their distribution strategies.”
Finally, wholesalers need a mindset of what customer excellence really means, and “that has to show through in all of our functions,” not just underwriting and product distribution, but claims and operations as well.
Propis believes the role of the wholesaler is evolving. She has seen the doomsday predictions that the wholesaler is going away and that the role of the wholesaler is irrelevant. In her view, that is ironic because there has never been a better time to be a real specialist in the E&S space. “The role of the wholesaler is more important than ever today.”
According to Drinkwater, one of the dynamics that has changed over the past five years is that the world has gone from the retailer and wholesaler being “two big buckets” to there being wholesale, retail and specialty buckets. He believes the role of a wholesaler has been driven to become more of a specialist.
Where is the talent coming from?
The main avenue talent takes to enter the industry is from colleges and universities that have insurance and risk management programs – that is “acquisition target ground,” Schaendorf said.
WSIA has partnered with universities and colleges that have those programs, she explained. The Education Committee at WSIA and the WSIA Education Foundation have created scholarships and internships throughout the nation. “We are all involved in symposiums at universities and colleges.”
Consequently, Schaendorf believes the talent gap is closing, and she attributes that to the investment in talent. She pointed to symposiums, some put on by colleges as recruitment tools. “Career opportunities are a real easy sell” when she does presentations at recruitment events.
According to Sanders, “it is all of our jobs to be advocates for careers in insurance, and certainly, the insurance and risk management programs have been a big assistance.” He agrees with Schaendorf that the gap is starting to close, but “we have a way to go. We are not just competing with each other, but are competing against other industries.”
Diversity and inclusion increasing
Propis opined that diversity and inclusion (D&I) have increased. Members of WSIA have done a lot in terms of diverse talent acquisition. For a long time, “talent acquisition took a backseat to our core business strategies,” she said. “Now that we realize that human capital is probably a more scarce resource than financial capital and other assets, we know that a D&I strategy is critical for success. For the surplus lines market to remain vibrant, success in fostering and developing an inclusive work environment is absolutely critical, and the companies that can develop effective plans to attract and foster and cultivate diverse employees will prosper, and those that do not will not,” she said.
“Execution is where we need to improve,” Propis said.
Women and minorities in the workplace are disproportionately affected by the COVID-19 crisis, Propis said. She cited a Forbes article which said that 14 percent of working women in this country are considering quitting their jobs because of the family demands that the coronavirus crisis has created. She believes that is a “disturbing” statistic.
“Can you imagine what would happen if 14 percent of the female employees at all of our companies suddenly resigned?”