E&S Expects To Prosper Despite SofterMarket

"The same conditions that led the industry into a prolonged softmarketpersist in today's environment," Oldwick, N.J.-based A.M.Best reported in its 11th annual E&S study, titled "2004 AnnualReview of the Excess and Surplus Lines Industry." Specifically, thereport cited conditions in the overall property-casualty marketthat include market fragmentation, excess capital and "too manyplayers."

Noting that the surplus lines industry has been more profitable andgarnered better financial strength ratings both in recenthard-market years and over the long haul the report predicted thatdespite the softening market, "solid profit opportunities" wouldcontinue to exist in the near term (in early 2005) for surpluslines players.

However, some newer market entrants "are likely to compress futureprofit margins by selectively competing onextremely attractiveaccounts," the report added, listing specialty operations ofBermuda holding companies (Quanta, Aspen Specialty and Arch), aswell as two U.S. companies (Richmond, Va.-based James RiverInsurance Co. and Maxum Indemnity Co. in Duluth, Ga.) among newmarket entrants.

As competition sets in, Best said that successful surplus linesinsurance companies will focus on value-added services. "Over thelong term, this focus can combat the tendency of policyholders toreturn to the cheaper admitted market when the cycle turns softer,"Best said.

Scott Bayer, senior vice president of the general liabilitydivision of New York-based Liberty International Underwriters, said"managing the market cycle is a constant process."

"We try to build a book of business that is as immune to marketcycles as we can make it," he said, explaining that the companytries to balance its book with accounts that stay in the surpluslines arena.

"How far the line between admitted and non-admitted moves dependson how soft the market gets," he said adding, however, that veryvolatile product liability business, certain types of commercialcontractors, bridge contractors or New York state contractors, andresidential contractors are among the classes that tend to stay inthe nonadmitted market. (Liberty International Underwriters, hesaid, entertains all but residential from that group.)

Like Best, Mr. Bayer subscribes to the view that valued-addedservice is a key to retaining business and distinguishing a surpluslines insurer from competitors in soft and hard markets.

He noted that Liberty International Underwriters (formed in 1999when Liberty Mutual combined its global specialty businesses) isdistinguished by the financial stability of Liberty Mutual, as wellas by its level of service measured in terms of how quicklypolicies are issued.

"We don't overcomplicate the process," he said, explaining howquick turnaround is achieved. In addition, he noted that hiscompany adds value through loss control and risk control expertiseand with the presence of an in-house claims staff.

Liberty International Underwriters also plans to get closer to itsclients through geographic expansion, according to Mr. Bayer. "Weopened up an office in San Francisco in March, which complementsour offices in Boston and New York," he said, noting thatadditional expansion throughout the country is planned.

"I think a lot of us tend to rely on technology and e-mails. Youcan't walk around here without seeing Blackberry's and cell phones.But really it's the face-to-face that people value," he said,adding that having a presence in more cities allows for bettercommunication with wholesale brokers and for more growth. "We'llsee opportunities we never saw before," he said.

On the distribution side, Burns & Wilcox is using technology tofuel local expansion, according to William McCord, a senior vicepresident for the Farmington, Hills, Mich.-based managing generalagency and wholesale brokerage.

Explaining the firm's "service center initiative," he said thatfour new centers in Reno, Nev., Baton Rouge, La., Las Vegas, andLivingston, N.J., are akin to satellite offices where employees canunderwrite and service accounts, while processing and backroomfunctions such as filing, printing of the policies and policydistribution are all done through the firm's 27 full branchoffices.

"Technology allows us to do this," he said, noting that Burns &Wilcox has built a wide-area network that connects all thefacilities together?allowing the service centers to work on thesame system as the branches.

The service-center approach "enables us to go out and find talentedpeople who know how to underwrite" and have relationships withretail brokers in the cities where they operate, he said, alsohighlighting the fact that heavy upfront costs of committing to bigleases and large support staffs are eliminated. "And they're readyto rock in the course of a week."

The key benefit of just having employees with relationships inthese areas fits well with a model geared to small and midsizedretail agency clients. "It's that local connection" that'simportant "where we have that ability to talk theirlanguage."

"It's not like someone from Louisiana talking to me. They clearlyknow I'm not from Louisiana," the Midwesterner said, noting that hewould be lost if a retailer told him about a property in OrleansParrish, while his Baton Rouge service center staff wouldunderstand immediately.

One growth driver for Burns & Wilcox has been a product focusinitiative a combination of external advertising and an internalcompetition, with monetary rewards focused around five selectedproducts last year, and another five this year. While the productsare not new offerings, "there's really been a big payback in termsof the volume of business we write in the individual lines," hesaid, noting that growth ranged from 35 percent to 500percent.

"Vacant property was the product with the biggest growth, and itjust surprises me because I thought all our [retail] customers knewthat we did that," he said.

Executives at GE Insurance Solutions told NationalUnderwriter that giving wholesalers a clear view of the firm'srisk appetite has fueled growth in its E&S Individual Riskunit, which writes specialty business through wholesale brokers.Although Michael Gill, president of the unit, said that GEInsurance Solutions remains "a small player" in this arena, henoted that "before two years ago, we had $10 million [in premium].Now we've got $100 million plus." He added that the unit has "beenbuilding a small slice of the huge E&S marketplace."

Brian Evans, vice president and underwriting manager for the unit,said at last year's NAPSLO meeting "we rented a ballroom and did adog-and-pony show about who we are and what we like to do, and eversince then, our submission count has tripled," attributing thegrowth to continued communication. "We have given clarity aboutwhat our risk appetite is, what we want to do and how we want to doit."

Reproduced from National Underwriter Edition, September 23,2004. Copyright 2004 by The National Underwriter Company in theserial publication. All rights reserved.Copyright in this articleas an independent work may be held by the author.