WTC Attack To Hike Surplus Submissions

Surplus lines insurers are unlikely to feel the immediate impactof the World Trade Center disaster that standard insurers will, butthey may face a surge of submissions as a result of the tragedy,according to an insurance analyst.

“The E&S exposure from the World Trade Center events, on theclaims side, is going to be way low compared to the standardmarket,” Ralph Cagnetta, managing senior financial analyst for A.M.Best in Oldwick, N.J., told National Underwriter during arecent interview.

Most of the large-limit policies, workers comp and preferredbusiness interruption business that will result in claims, werewritten on an admitted basis, he said, predicting only “isolatedexposure for some surplus lines companies.”

The most significant effect on the surplus lines market, hesaid, will be the “more powerful wave of business [that will be]heading their way.” As large commercial writers review underwritingpractices, surplus lines insurers are going to be asked to quote alot more of the business that they hadn't seen before, heexplained.

Mr. Cagnetta, the primary author of a recently-released A.M.Best report on the financial health of the surplus lines market,based his comments on opinions of “prominent” surplus linesexecutives he called to respond to the question. Based on hisknowledge of the market, he said he agreed with their initialassessments.

For the eighth consecutive year, insurancerating agency A.M. Best issued its annual report on the excess andsurplus lines industry, finding its financial performance andsolvency measures “on par” with the admitted market.

But in spite of posting a direct premium growth rate nearlydouble the rate for the entire property-casualty industry in 2000,the rating agency doesn't foresee improving operating results foreither group in 2001, according to the report and a recentsix-month analysis of the p-c industry released separately.

The report, like seven prior ones, was commissioned by the DerekHughes/ NAPSLO Education Foundation, which was formed by the KansasCity, Mo.-based National Association Of Professional Surplus LinesOffices, Ltd. in 1991. Published prior to attacks on the WorldTrade Center and the Pentagon, it was scheduled to be distributedat the NAPSLO annual meeting, which was cancelled in the wake ofthe tragedy.

While direct premiums for surplus lines insurers rose 9.8percent in 2000, “rising loss cost trends and increasingreinsurance costs will serve to somewhat offset improving operatingmargins in 2000 and 2001,” the rating agency said.

The 9.8 percent jump was the biggest since a 13.1 percent climbin 1993. And business is continuing to move back into the surpluslines market, the report said, citing information from stampingoffices and commentary from surplus lines underwriters andbrokers.

Still, “Best feels that conditions thatledto a prolonged soft marketpersist in today's environment,” thereport said, citing the presence of excess capital and too manyplayers among them.

In spite of double-digit increases on commercial lines renewalbusiness, “new business remains competitive and pricing is lessrobust,” the report said.

Subtle differences in the language of reports issued this yearand last year suggest an outlook dimmer than one might expect tofind described in the first report on the surplus lines industry inrecent years to finally confirm the unquestioned presence of ahardening market.

Careful readers, for example, will not find a section headed“Strong Financial Condition” in the report's executive summary thisyear. Instead, the heading, which appeared in the 2000 report,simply reads “Financial Condition of the Market” for 2001.

And the text of the 2001 report describing the “financialcondition” now tells readers that “underwriting results achieved bythe surplus lines market have weakened in recent years,” citing areduced amount of favorable reserve development on prior accidentyears as a main cause of the deterioration.

Still, underwriting results for a surplus lines market composite(of 66 companies writing $5.9 billion in direct premiums in 2000)were better than the industry for 2000 and over the last fiveyears. The composite 2000 combined ratio of 103.4 beat the industryby seven points, Best said, with nine points separating the groups,on average, over the last five years.

Mr. Cagnetta sees such favorable comparisons for surplus linesinsurers as the most important findings in the study.

“Despite challenges faced by E&S companies, such ascompetition from the admitted market and regulatory challenges, thesurplus lines market does continue to maintain a high level offinancial strength and solid operating results, which are supportedby sound underwriting guidelines and effective risk managementtechniques,” he said.

“Our median rating for surplus lines writers continues to be'A,' which compares favorably to the standard market, which has amedian rating of 'A-minus,'” he added. “We would attribute the morefavorable rating to demands by the marketplace that E&Scarriers maintain a higher level of capital,” he explained, addingthat “E&S writers tend to operate with more conservativeoperating leverage and more disciplined underwriting.”

The median surplus lines rating that Mr. Cagnetta referred to isfor 91-rated “domestic professional surplus lines companies.” Bestclassifies companies that write more than one-half their directpremiums on a non-admitted basis as domestic professional surpluslines companies. (Non-admitted business is written by an insurernot licensed where the risk is located, but placed through alicensed surplus lines broker.)

As in prior years, Best's analysis shows surplus linesinsolvency rates mirroring those of traditional insurers over along time span, with both groups showing an average failurefrequency of 0.86 percent from 1972-2001. In each of the last fouryears, however, insolvency rates for surplus lines insurers werehigher.

While the report cites insolvencies of several IllinoisInsurance Exchange syndicates in 1996-1999 as one cause of higherrecent failure rates, the report doesn't include any companies inthe Frontier Insurance Group in either failure count. Last year'sreport classified three Frontier companies as surplus lines,including Frontier Pacific Insurance Company, which was conservedby California's insurance commissioner after the Best report wascompiled.

The “complexion” of the surplus lines market has changedsignificantly as a result of Reliance's insolvency and the exitsfor Frontier and the Acceptance Insurance Companies of Omaha, Neb.,the report said. The surplus lines failure count includes twocompanies in Reliance Insurance Group, while six others are in theadmitted total.

In what Best calls a “market increasingly dominated by largeplayers,” some consolidation activity has also changed the Best'slineup of the leading 25 surplus lines groups. Travelers, which nowincludes companies once in the Associates Capital Group, made thebiggest leap–to 7th place from 25th last year

Exits and consolidations made room for five new entrants to thetop 25 groups listed in the Best report–RLI, Western World, GECapital, Front Royal and PMA Capital Corp.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 21,2001. Copyright 2001 by The National Underwriter Company in theserial publication. All rights reserved.Copyright in this articleas an independent work may be held by the author.

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