FROM 2001 through 2003, the excess and surplus lines marketplaceenjoyed a remarkable run. As standard insurers curbed theirunderwriting in the hard market, direct written premiums in theE&S segment increased by 35.66% in 2001, by 61.67% in 2002 andby 28.3% in 2003, according to A.M. Best.

Since then, however, growth has stalled. According to an A.M.Best report released last September for the National Association ofProfessional Surplus Lines Offices, the E&S marketplace grew byjust 0.65% in 2004. That was the lowest rate since 1996, whenE&S premiums actually fell by 0.4%.

It will be interesting to see the numbers for 2005. While it'sunlikely that premiums grew much in the first half of the year,it's hard to predict just how last fall's unprecedented hurricaneseason affected, and will continue to affect, the balance ofbusiness between E&S and standard insurers.

It also remains to be seen just how the hurricanes and thedamage they did to reinsurers will affect the E&S marketplace.The early signs are that capacity problems are likely to hit onlylarge coastal property risks, but some industry executives say thejury is still out.

What is indisputable is that the importance of the E&Smarketplace continues to grow. In 2004, it topped $33 billion inpremium, according to A.M. Best, and accounted for 14.14% of thetotal marketplace. That was up from 13.1% the year before and from6.43% a decade earlier.

Where will the E&S marketplace go from here? That was aquestion we recently put to the current presidents of NAPSLO andthe American Association of Managing General Underwriters, as wellas four past presidents of the associations. We also contactedexecutives of our leading E&S insurers. In general, theintermediaries saw a more competitive year ahead with fewsignificant capacity problems. Certainly, they seem to feel underpressure to produce. Some insurers, on the other hand, seem to seemore storm clouds ahead, particularly as reinsurance renewalscontinue to come in, and are predicting a relatively flat year. Thefollowing are their comments.

Lawrence M. Wesson
U.S. Risk Insurance Group
For Mac Wesson, presidentand COO of U.S. Risk Insurance Group, and the current president ofNAPSLO, the aftermath of last fall's hurricanes has not played outas he expected.

“After the storms, I–along with a number of otherpeople–predicted that not only would property capacity becomerestricted… I predicted there would be a 'follow-along' effect onthe casualty lines. That didn't happen.” Instead, he said, pricesfor everything except property prone to wind damage either remainflat or are going down.

U.S. Risk has headquarters in Dallas and a number of branchoffices around the country. It also has a London-based Lloyd'sbroker and various subsidiaries, some of which offer fee-basedservices, like claims adjusting. In regard to its domesticinsurance operations, about 55% of its business isconducted as anMGA or program manager, and 45% as a surplus-lines broker. Morethan 90% of its business is nonadmitted.

Although many 2006 reinsurance contracts have yet to renew,Wesson declined to speculate on whether they will be morerestrictive or even if they significantly will harden the market ifthey turn out to be. “Our industry is a global industry, and theeconomies are so large that it's really difficult to predict whatis going to happen,” Wesson said. “But we do hear of a lot ofcapital finding its way into our market, and that means morecapacity, which typically means more downward pressure onpricing.”

“Anytime a market starts to soften, the tell-tale symptom is themigration of business back to the standard market,” Wessoncontinued, adding that he has seen such movement in regard toloss-free accounts that have somewhat predictable riskcharacteristics. Products liability, he said, is one example.

“There was a day that that was almost exclusively an E&Sline,” he said, but as the line has become more predictable,standard carriers have shown more interest in it. While an admittedcarrier may have jettisoned such a risk during the hard market, “ifit's relatively clean and has some size to it, it's finding its wayback,” he said, “sometimes at a significantly reduced price.”

Despite such competition, E&S carriers continue to findopportunities, Wesson said. For instance, he cited a company thathe declined to name that believes it has a good chance to write alot of reconstruction contractors in areas affected by HurricaneKatrina. “They're going after that very aggressively,” he said.

Despite what he believes will be softening market conditions,Wesson said he expects U.S. Risks to grow and be profitable in2006. “There's plenty of business out there; you just have to gofind it,” he said.

Wesson said U.S. Risk brokers and underwriters will spend lesstime in the office this year. “We encourage, and in some casesrequire, our people to be out in the field visiting with theirretail customers on a more frequent basis, understanding what theirneeds are and asking them for business,” he said. Wesson said hecalls such encounters “at bats.”

“You can't get a hit, unless you get an at bat,” he said, “andyou can't get an at bat unless you ask for it.”

Wesson said U.S. Risk also is making strategic changes as itadapts to a shifting marketplace. In the past year, it sold analternative-market subsidiary and a division that wroteprofessional liability insurance for public entities. On the otherhand, it has opened a branch in Southern California, staffed by 10employees, and last month acquired Lighthouse Underwriters, a $60million program manager.

Nor does Wesson expect E&S carriers to retreat, even ifmarkets soften. “The E&S market segment now is north of $30billion (in volume),” he said. “It is impossible not to proclaimthat as a significant portion of the overall property-casualtybusiness. I think a lot of E&S carriers see opportunities, evenin a flat or softening market, to increase their market share. Iknow that all of them are in aggressive growth modes.”

Francis Johnson
Johnson & Johnson Inc.
Although the Carolina coasts were not severely damaged by lastfall's hurricanes, Francis Johnson said they certainly affected theE&S insurance climate there.

“Rates at a minimum have flattened or gone up slightly, anddeductibles have gone up,” Johnson said, adding that for somelarger property risks the effect has been more pronounced. “Rateshave gone on from 10% to 15%–even as high as 25%, depending onconstruction and location.”

Johnson is the president of Johnson & Johnson Inc., inCharleston, S.C., and the current president of AAMGA. His agencydoes business in Georgia, as well as the Carolinas. About 70% ofthe agency's business is placed with nonadmitted carriers. Johnson& Johnson writes a broad array of risks, including specialtypersonal lines, and has a sizable book of commercial coastalproperty insurance.

Johnson said that by necessity, his evaluation of E&Smarketplace conditions are preliminary. He said, for instance, thatit probably will take all year to gauge the impact of last year'sstorms on reinsurance markets. So far, however, Johnson said hisE&S markets have not announced major changes in rates. Whilesome have decreased their writings on the coast, “not many havetaken their whole book and said, 'We have a 5% or 10% increase,'”Johnson said. “Most have said, 'We're going to stay right where weare.'”

For 2006, Johnson is projecting a growth rate of 10% to 15%,which would be down slightly from last year. He said he isconcerned about having adequate capacity and that the eventualanswer to any shortage probably will be the entry of newnonadmitted markets into his territory. Both South Carolina andNorth Carolina are fairly deregulated, he said, making itrelatively easy for new carriers to come in. Such was the caseafter Hurricane Hugo struck South Carolina a little north ofCharleston in 1989.
“After Hugo, we lost some markets,” Johnson said, “but in the nextcouple of years we had new markets come in. I think we're going tosee that again.”

Len LoVullo
LoVullo Associates Inc.
As he looks ahead, Len LoVullo said it's hard to see anything otherthan softer markets and more competition.

“There is a lot of movement on renewals,” said LoVullo, who ispresident and CEO of LoVullo Associates, in Buffalo, N.Y, and apast president of AAMGA. “Our retailers are becoming verysophisticated at putting their renewals out to the marketplace.They know that their standard markets are loosening up, and theyalso know there are some very good wholesale markets” available tothem.

LoVullo Associates writes almost all of its business in NewYork. About 15% of its volume comes from specialty personal lines,which is all placed with admitted markets. About 85% of itscommercial-lines business is insured by E&S carriers, LoVullosaid, although standard insurers are giving them a run for theirmoney. Risks that normally would be considered E&S in nature,like restaurants, daycare centers and vacant properties, arefinding their way into the standard market, he said. “Evencontractors, to a certain degree.”

Last fall's hurricanes fell far from New York, but LoVullo saidthey've affected him nonetheless. The agency primarily representsnational carriers. “They're dictating what our pricing should be,based on what happened to them in the Southern states,” he said.Meanwhile, regional insurance markets that had no exposure to thestorms and buy little if any reinsurance are in prime position topick off accounts. “We're losing property (business) because wecan't be competitive with the regional carriers up here,” hesaid.

Some 20% of LoVullo Associates' business istransportation-related. Competition for it has become intense,LoVullo said. This business is placed with admitted markets,LoVullo said, because New York, like most other states, requirescommercial auto insurance to be written on that basis. Many majorE&S companies, however, have admitted affiliates they use towrite commercial auto while sometimes placing motor truck cargo andother truck-insurance lines in their nonadmitted facilities.LoVullo said they're facing competition in New York, however, fromadmitted insurance companies that are entering the market andwriting everything on a package basis.

“Trucking is very competitive, especially in Downstate New York,where there is a lot of business and everyone wants a piece of theaction,” LoVullo said. “If this competition continues, the pricingcan only go down.”

LoVullo said the E&S carriers he's spoken with had a greatyear in 2005 and still expect moderate growth–in the 4% to 8%range–in 2006. Despite all the competition in the Empire State,LoVullo said many E&S carriers say they continue to seeopportunities. They include risks in urban areas with values under$500,000, including commercial habitational property, vacantproperty, and small mercantile accounts. “These are the things wespecialize in and love to look at,” he added.

Getting such business, however, is going to take effort, hesaid. “We've pretty much got to go back to the basics on themarketing side,” LoVullo said. “That's really the theme for usthroughout '06.” He said LoVullo Associates and other MGAs willneed to train underwriters not only to provide good service overthe telephone but also to make calls on retail agents and ask fornew and renewal business. “We call it 'feet on the street' andbeing 'road ready',” he said.

Joseph Timmons, CPCU, ASLI
Midwestern General Agency
After two successive yearsof heavy catastrophe losses, standard insurers who think 2006 willbe business as usual may be fooling themselves, according to JoeTimmons. If they are, the year ahead could be a good one for theE&S marketplace, he said.

“Hopefully, I'm not looking through rose-colored glasses, but Isee a resurgence of the hard market, particularly in the propertyarea,” said Timmons, who is president of Midwestern General Agencyin Kansas City, Mo., and also a NAPSLO past president.

Midwestern primarily does business in Missouri, Kansas, Iowa,Nebraska, Illinois and Arkansas. It derives about 60% of itsbusiness from MGA operations and 40% from brokerage. About 90% ofits commercial business and 20% of its personal-lines business isplaced with nonadmitted markets. On the commercial side, it writesan array of Main Street and middle-market accounts, includinghabitational risks.

Timmons said the E&S insurers he's spoken with areprojecting a flat or slightly down year in 2006. But he noted thatthe insurance industry has suffered tremendous catastrophe lossesin the past two years (nearly $57 billion in 2005 and $27 billionin 2004, according to the Insurance Information Institute), whichstandard insurers don't seem to be acknowledging. That could bemaking E&S carriers unnecessarily downbeat, he said.

“I don't think anyone on the standard side is willing to admitthe king has no clothes,” Timmons said. But the day of reckoningfor standard insurers has to come, he said. “They can't afford totake another hit on the chin, so they are going to have to pullback from certain areas and perhaps even look at some of theirmarginal classes of business.”

Timmons said he also expects a significant correction in thestandard-lines marketplace because of likely changes to flawedcatastrophe models. The attachment point for reinsurance underthese models was too low, he said. That may have been a boon toinsurers, Timmons said, but it was a bane to reinsurers.Furthermore, many models did not adequately take business incomelosses into consideration. After models are revised, he said, “theprice of poker” is likely to increase as primary insurers find moreof their own surplus exposed to loss and reinsurance above thehigher attachment points more costly. He said all of this couldlead more standard insurers to ask themselves, “Do I really want tostay in this game?”

Timmons said a number of his standard carriers already have beenaffected. Following Jan. 1 reinsurance renewals, he said the ratesfor one of his carrier's reinsurance treaty increasedsignificantly, despite the fact that its attachment point also roseto $15 million from $7 million.

Because of the heavy losses and the withdrawal of reinsurance,Timmons said he expects to see tightening first affect largeproperty accounts and catastrophe exposures, then continue to“ripple” through other property and liability lines. Consequently,he said, the surplus-lines market is likely to see a resurgencelater in the year.

For the year ahead, Midwestern General Agency is budgeting for18% growth, Timmons said, “which I know is fairly aggressive.” Someof this will come by providing admitted commercial-lines productsto small retail agents and brokers in rural areas, he said, but headded that he also sees good opportunities for E&Sbusiness–particularly if the industry goes through another roughhurricane season.

Marketing will be important in the year ahead, Timmons said. Hesaid he's getting more visits from E&S carriers asking how theycan do more business with his agency and offering co-op advertisingand other forms of marketing assistance. MGAs and surplus-linesbrokers, meanwhile, have to step up their marketing efforts aswell. “We've seen retailers who are consolidating the number ofwholesalers they are doing business with,” Timmons said, making itimperative for wholesalers to stay in touch.

Maureen Caviston, CPCU
Partners Specialty Group LLC
Sometimes E&S carriers don't seem that much different fromstandard-lines insurers–particularly in how they regard theirdistribution forces. Like insurers everywhere, E&S carriers areclosely monitoring the effectiveness and efficiency of producers,and are looking to partner with the best ones.
“Companies definitely are allocating their capacity to the brokersthat make their jobs easier and that are presenting the risk in themost concise manner possible” said Maureen Caviston, president ofPartners Specialty Group, a surplus-lines broker that hasheadquarters in Norristown, Pa., and operates eight other officesaround the country.

While MGAs tend to have steady relationships with the carriersfor which they are authorized to underwrite and bind business,surplus-lines brokers today face a less secure environment, saidCaviston, who is a past president of NAPSLO. Technology, she said,has allowed E&S insurers to capture much more data aboutbrokers than they could in the past, enabling them to know, forinstance, which have the best hit ratios. So now they are doingbusiness only with brokers who really understand their products andare proficient at selling them, she said. “They are seeing thevalue of limited access,” she said. “It's good for them and goodfor the broker, because it's better to do business with a marketthat is not open to all brokers.”

While Partners Specialty Group has been increasing the amount ofbinding business it does, well over 90% of its business remainsbrokerage, she said. About 75% of it is placed with nonadmittedmarkets, she said. Partners Specialty Group writes all types ofbusiness but prefers to handle more difficult accounts, for whichthere is less competition, she said. “I would say that if there isa constant, it would be 'the tougher the better.'” Construction,health care, medical products/life sciences and environmental risksare among the niches in which the brokerage is active.

Caviston said it will be more challenging in the year ahead toarrange property coverage for larger risks with catastropheexposures. Surplus-lines brokers will be forced to arrange morecoverage layers, she said, so placements will become moretime-consuming. She said some E&S markets have told her theyare cutting the limits offered on such properties by a third to ahalf, depending on the severity of the risk.

Other than for property with catastrophe exposures, Cavistonsaid, last fall's hurricanes so far don't seem to have affected theE&S marketplace greatly. At last September's NAPSLO convention,many people predicted tightening would spread to other sorts ofaccounts, she said, but “the typical, non-cat E&S property riskstill draws plenty of interest.”

It's still too early, however, to make a final assessment of thehurricanes' impact on insurers and reinsurers, she cautioned. “Iwas with a specialty carrier (in early February) that said theadjusters are still getting out to some of those losses andassessing them,” she said.

In regard to casualty coverage, Caviston said some people expecttamer risks to flow back to the standard marketplace, just as theypredicted they would last year. But larger E&S markets may bereluctant to let some business go, she said. “Our insurancecompanies rarely budget to lose business,” she said. “Most want tocontinue to grow.”

Large carriers are particularly likely to compete moreaggressively for E&S business, she said. “Some of the biggestcompanies have the biggest budgets for growth, which has to concernyou.” If one assumes that rates are going to flatten or moderate,as many people do, then the only way companies can grow is byincreasing market share, she said. One way they may do so is byputting pressure–subtly, in many cases–on surplus-lines brokers,she said. For instance, she said, a carrier may leverage lines ofbusiness, saying, in so many words, “I'll quote the cat property,but we'd like an opportunity to quote the liability as well.”

Smaller E&S insurers, by necessity, seem to be showing a lotof discipline, Caviston said. They carefully are studying the linesof business they are getting into and doing a good job of managingtheir books across those lines, she said. “They don't want to betop-heavy in any one line. They're saying, 'I'm getting into thistough line of business, but I don't want to write any more than $X,and once I reach $X, I'm out of it.' I think that's smart.”

James A. Roe, CPCU, ASLI
Arlington/Roe & Co. Inc.
At Arlington/Roe, an Indianapolis-based MGA, E&S carriers arelikely to play a smaller role in the year ahead, according to JamesRoe, president.

“We see the excess and surplus lines vehicle being challengedmore and more in our marketing territory,” said Roe, who also is apast president of AAMGA.

Other than for an aviation program that it offers nationwide,Arlington/ Roe primarily writes business in Indiana, Illinois,Michigan, Ohio, Kentucky and Tennessee. While it does a substantialamount of brokerage business, it defines itself primarily as anMGA. Most of its employees have underwriting backgrounds fromstandard companies, Roe said. “Even our brokerage people underwritebusiness that they send to our brokerage markets.” About 65% ofArlington/Roe's business is placed with admitted markets. Thefacility bills itself as a “one-stop shop” and writes a variety ofbusiness, including transportation, professional liability(including medical malpractice), workers comp, specialty personallines and bonds.

Roe said last fall's hurricanes so far have had little effect onArlington/ Roe. “The impact in our area is slim or none,” he said.In the Midwest, property and short-tail liability business justcontinues to get more competitive, he said. Limits are going up andprices are heading down, as standard companies continue to expandtheir underwriting appetites, he said. For instance, Roe said herecently used a nonadmitted company to compete for a classicE&S risk: a plastics manufacturer with $3 million in values–andno sprinkler system or other protection. “A standard company justdecided to write that account,” Roe marveled. ” Unsprinklered–so ifyou have a loss, you're probably going to have a good one.”

Roe said the percentage of his business that is placed withadmitted markets probably will continue to grow a bit if, as heexpects, more states go to some form of rate deregulation. “Itmeans that the admitted companies can price their products a littledifferently, and you don't necessarily have to go to asurplus-lines company for that freedom of rate anymore,” he said,adding that his general counsel has informed him that Indiana mayenact commercial-insurance deregulation legislation this year.

Roe said that E&S companies appear to be “taking a littlestep back and kind of waiting to see what the rest of the marketdoes.” He said a couple of carriers he's talked with see a flatyear ahead, but most are shooting for at least some growth–5% orso–in policy count and premium. “But as the year goes on, it willbe interesting to see if they can truly get there,” Roe said. “Isuspect that by year end–probably starting in the thirdquarter–we're going to see a lot more competition in rate andunderwriting, as companies try to fill out their budgets.”

Kevin H. Kelley, CPCU
Lexington Insurance Co.
In 2006, the E&S marketplace likely will go whereverreinsurance takes it, according to Kevin Kelley, chairman and CEOof Lexington Insurance Co., the nation's largest E&S insurer.“This is a reinsurance-led market,” he said, “at least at thispoint.”

In regard to property insurance, Kelley said the Jan. 1reinsurance renewals were up sharply for catastrophe covers–by asmuch as 50% to 150%, depending on exposures, and retentions rosetoo. Rates also are up for pro-rata property treaties and per-riskexcess, “so reinsurance is going to influence the market in manydifferent ways,” he said.

“I think (property rates) will harden throughout the year asmore and more reinsurance treaties pass the renewal cycle” on April1, July 1 and Oct. 1, he said, “and I think with each cycle, theterms probably will get more stringent.”
It's too early to say whether property rate increases will beconfined to coastal areas or become more widespread, Kelley said.“If you're a national property writer, regardless of how much wind-or earthquake-exposed business you have, you're going to see amaterial increase in your catastrophe covers. So it's a question ofwhere and how you apply that increase.”

While Katrina and the other hurricanes of 2005 played havoc withmajor personal-lines insurers like Allstate, Kelley said E&Scarriers did not necessarily get off any easier. Insurers likeLexington that mainly are first-layer markets wrote checks forwhatever their limits were, thus capping their losses, he said. Butcarriers that wrote large excess layers wound up paying much moreon some losses than the primary insurers did. In some ways, Kelleyobserved, Katrina was as much like an earthquake as a hurricane,producing enormous claims for infrastructure and other high-valuedproperty, as well as a multitude of homeowners and small-businessclaims. The results are still being sorted out in the excessproperty and reinsurance markets, he said.

As Lexington looks ahead, “we're not shying away from propertybusiness,” Kelley said, adding, however, that “we are looking tomanage our catastrophe exposures in this new reality. We believethat rates have to go up, deductibles have to be increased and, insome cases, terms have to be tightened.” While making the necessaryadjustments wouldn't keep Lexington out of the red in the event ofanother hurricane season like last year's, if there were to be arepeat of the 2004 season, which was formidable in its own right,Kelley said, “We think we would make money.”

So far this year, casualty reinsurance renewals are not upsharply, but Kelley said it's still too early to tell how they willplay out. Reinsurance issues could wind up affecting casualty riskswhere excess limits and capacity are required, he said. An examplewould be directors and officers liability coverage for Fortune 2000companies, he said. Kelley said he also sees such risks as anopportunity for E&S carriers. “One trend we are seeing is that(large) clients are beginning to buy higher limits,” he said, forcommercial general liability as well as for D&O.

Lexington derives about 80% of its business from surplus-linesbrokers and about 20% from about 100 program administrators, Kelleysaid. A continuing goal in 2006 will be looking for ways to enhanceLexington's relationship with these specialists, he said, includingthrough the use of proprietary technology.

John Edack
Arch Insurance Group
As he looks ahead, John Edacksees the E&S market growing modestly in 2006. Casualtypremiums, which he said make up the bulk of E&S business,likely will decrease, as rates for liability risks continue tosoften. Any drop, however, should be more than made up by higherpremiums commanded for property coverage, he said.

Edack is the western regional executive vice president of ArchInsurance Group, the nation's fifth-largest E&S insurer. Inall, Arch derives about 52% of its business from surplus-linesbrokers and MGAs, including program administrators, he said. Therest comes from retail agents and brokers. Among the nonadmittedbusiness it writes through its wholesale channel are primary andexcess casualty, property and medical malpractice, he said.

Like just about everyone else contacted for this article, Edacksaid property insurance will be the big story for the E&Smarketplace in 2006. He predicted a “robust” market, as insurersanalyze their costs for catastrophe and per-risk reinsuranceprograms and the rating-agency capital requirements. “The market …will be better defined as the year goes on,” he said.

Edack said the reinsurance market “appears to be acting in avery responsible manner. As they figure out their ownretrocessional costs and capacity, they too will have to pass thosecosts on to the ceding companies.” For the year ahead, Edackpredicted “plenty” of reinsurance capacity for casualty lines. “Inproperty, there probably will be shorter limits, with more playerson layered programs,” he said.
For the year ahead, Arch continues to see E&S opportunities inCalifornia residential construction business, Edack said. “Productsrisks also continue to be a home for E&S writers,” headded.

Edack said Arch plans no major changes in its wholesaledistribution force, although individual brokers are added anddropped on an ongoing basis. “We have a well-seasoned distributionplant,” he said. “We continued to weed it and to work with thosewho feel we have mutual opportunities.”

From his post in San Francisco, Edack has an excellent view ofthe California market, the largest in the country for E&Sbusiness. He said he expects it to more or less reflect the marketat large. Property rates may not be up as much, since the statedoes not have an inordinate wind-storm exposure, he said. On theother hand, he noted, the casualty market is not likely to softenas much as it may elsewhere.

Mike Miller, CPCU, CLU, ASLI
Scottsdale Insurance Co.
As noted at the beginningof this article, the E&S marketplace grew at a torrid paceduring the hard market, then barely grew at all in 2004. MikeMiller, the president of Scottsdale Insurance Co., which is thenation's fourth largest E&S insurer, doubts that the numbersfor 2005 will look much different. For 2006, he predicts directwritten premiums will do no more than rise (or fall) by 1%. Nordoes he think that's necessarily a bad thing.

“I keep saying it's a sensible market right now,” Miller said.With the Fed signaling that interest rate increases may end soon,carriers can't look to big gains from their investment portfolios.Reinsurance is likely to remain tight and the economy, whilereasonably strong, is no barn-burner. In such an environment,E&S carriers have strong incentive to maintain underwritingdiscipline, he said. “That doesn't mean that there isn'tcompetition, but it hasn't gotten so cutthroat that people aredoing things that ultimately result in the significantdeterioration of results.”

Scottsdale would appear to have been one of those “sensible”players in 2005. “Our growth was less than what we had hoped for,”Miller said, “but still we ended up growing a few percentagepoints–and our combined ratio was in the mid 90s.” For 2006, thecompany hopes to grow a couple of percentage points more than itdid last year while maintaining the same combined ratio, hesaid.

Miller said he expects the market to continue to soften nextyear, except for Southeastern coastal property, where capacityproblems are appearing and rates are headed up. He said there couldbe “some opportunity” for Scottsdale in such areas, but only to theextent its reinsurance treaties will permit. “The rates will begood,” he said, “but it comes back to how much capacity you havefor catastrophe losses.”

In 2004, the four hurricanes that hit Florida collectivelycaused extensive losses, but since they were four separate events,reinsurers got off relatively lightly, Miller said. Katrina,however, was another matter. “There was a big pop, and a big chunkof that went to the reinsurance market,” Miller said. That wasreflected in the rates for catastrophe covers in Jan. 1 reinsurancerenewals. “We have a July 1 renewal, and we would anticipate priceswill be going up then as well,” he said.

At the moment, Scottsdale has no new products on the drawingboard, Miller said, and rather will look for ways to enhance itsexisting ones in response to perceived opportunities. Scottsdalederives about 80% of its business from MGAs and program managers,and the rest from surplus-lines brokers. Miller said the brokerageend of the market was the more competitive segment last year, asstandard insurers aggressively went after large accounts. He saidhe expects that pressure to continue in 2006, as the hard marketbecomes a memory. “The significant price increases have stopped,”he said.

Letha E. Heaton
Shand Morahan/Evanston Insurance Co.
In terms of its overall combined ratio and solvency rate, “theE&S industry is probably as well poised as it ever has been inits history,” according to Letha Heaton. Having said that, however,she added that the jury is still out on the effects of lastseason's hurricanes.

Heaton is senior vice president for sales and marketing at ShandMorahan & Co., a surplus-lines underwriting company that placesbusiness with Evanston Insurance Co., the sixth-largest E&Sinsurance company, and Essex Insurance Co., which is the ninthlargest. All three are owned by Markel Corp.

In regard to hurricanes Katrina, Rita and Wilma, Heaton saidMarkel has reported losses, as have many insurance companies,higher than those associated with 911. “We as an industry arerevising not only our expectations regarding the frequency of thesekinds of storms, but working to assure that we have the models toguide us for an expected higher loss frequency, from an actuarialperspective,” she said.

Heaton said that Markel's E&S companies plan to continueproviding capacity to coastal areas, however, as long as it ispossible to get an adequate rate to cover the exposure. “If youlook at what is going on just in Louisiana,” she said, “propertymarkets are exhausted. There is no capacity there any longer. Thatsays something about whether the right rate was there on line tobegin with.”

Heaton said reinsurers apparently were as surprised as carriersby the ferocity of last season's storms and that the E&Sindustry could experience capacity problems as a result. “Havingsaid that,” she added, “we believe we have strong financialpartners, and we are not having any difficulty with ourplacements.”

As she looks ahead, Heaton said Markel sees opportunities in themarine and energy niches, and recently formed a unit to serve them.“There is a lot of indication that that market is getting a littleharder now,” she said.

On the whole, however, Markel's E&S units probably willremain cautious, Heaton said, in keeping with what she predictedwill be a flat year overall for the E&S industry. “Right nowour plans, frankly, are pretty much to stick to our knitting.” shesaid.