Whenver rates are high and capacity tight in the standard insurance market, producers turn to excess and surplus insurers, especially for high-risk customers. Over the past two years, however, with admitted insurers competing for all types of business, even specialized coverages can usually be placed in the standard market--often for half the price of E&S coverage.
But in spite of current conditions, the surplus lines market is in no danger of extinction. With years of accumulated underwriting and professional expertise, the E&S market is a stable and indispensable presence on the insurance landscape.
AAB spoke with experts from several top E&S insurers and other professionals to find out what they're seeing in today's business climate.
Mark Lyons and John Edack
Arch Insurance Group
"Except for D&O coverage, average E&S pricing for the industry is down 10 percent compared with last year, due to additional players and capacity in both the standard and E&S markets," said Mark D. Lyons, chairman and chief executive officer of Arch Insurance Group, New York.
To stay competitive, Arch has been developing new products and building new capabilities the past 12 months. Examples include Arch Wexford, their new excess workers' comp line, as well as a new guaranteed cost workers' comp product, a new Railroad Protective policy, and the Corporate Canopy policy, where buyers can mix and match management liability, fiduciary, D&O and EPLI coverages. "Arch is committed to innovation in support of our customers," said Lyons. "Careful risk selection remains the hallmark of Arch's business approach and the new portfolio of products we are building enables us to deliver effective solutions for these risks."
In addition, John Edack, executive vice president and chief regional officer, notes that Arch is also developing detailed regional marketing plans for industries including construction, healthcare, real estate and energy. "As part of our new small business initiative, Arch is looking at opportunities in both healthcare and executive assurance, and on the casualty side, is working closely with various Northeastern wholesalers on small-account residential business," said Edack. The company recently added offices in Philadelphia and Dallas.
Bernd G. Heinze
AAMGA
"Although many of our members are down anywhere from 5 to 10 percent from last year for renewals and premiums, a lot depends on where they're located," said Bernd G. Heinze, executive director of the American Association of Managing General Agents (AAMGA). "In coastal areas they're actually gaining business because standard companies don't want to write within 100 miles of a coastline."
In spite of insurance market cycles, E&S insurers pride themselves on their ability to consistently handle the toughest lines of business. "Wholesale market insurance professionals love to write high-risk business that can be rated, written and served," he said. "Virtually all lines of business are standard for the E&S market." A recent A.M. Best report noted that the E&S market continued to grow general and personal liability in 2007.
AAMGA recently convened a group of thought leaders from inside and outside the wholesale marketplace in a "2018 study," which will examine buying patterns, the impact of e-commerce, future opportunities and the ongoing role of agents and wholesale brokers.
Daniel F. Maher
Excess Lines Association of New York
E&S transactions and premiums are down in New York, said Daniel F. Maher, executive director, Excess Lines Association of New York. "We saw the New York excess market take off in 2001, even before 9/11," he said. Growth was consistent, with the number of transactions going from 187,500 in 2004 to 218,500 in 2007. But about three years ago the numbers started to plateau, and total taxable premium has remained in the $2.5 billion range. And while transactions are up through the first five months of 2008, premium for this period is down about 9 percent, Maher noted.
Granted, this market is unique: New York City saw 25 construction-related deaths last year, and office towers and large law firms present high risks, for which coverage is layered up in subscription policies in the nonadmitted market, Maher said.
Although it's unlikely that the E&S market will transform dramatically in a year, political changes could have an impact, Maher said. "There are now more than 80 insurance bills in Congress, including the House's efforts to move the Office of Insurance Information," he said. "We probably won't see significant federal regulation this year because of the election, but legislators are closely scrutinizing financial services, and the feds will definitely play a role in the future of insurance regulation as well."
Hugh Burgess
Fireman's Fund Insurance Co.
Fireman's Fund has more than 100 programs and $500 million in affinity sales in its Specialty Insurance and Commercial Business segments, although most of this business is in the standard commercial market.
FFIC has focused on more stable business within surplus lines that will always remain in surplus--such as product liability and accounts with losses that add a risk management plan, said Hugh Burgess, senior vice president and chief underwriting officer, specialty insurance. "There will always be insureds with losses, so this is another steady line of business for the excess market in spite of market conditions," he said.
Burgess speculated on whether first-quarter 2008 results would spur a shift to a harder market. "Cat losses for first-quarter '08 have been the greatest since 2005. With insurers seeing underwriting losses and scarce investment income, a major earthquake or hurricane could trigger a hard market. However, the industry has proven that we can go a lot longer than one quarter with losing money, so it will probably take more than that before it will change."
Coryn Thalmann
Jimcor Agencies
"We often hear from our brokers that they need the best price to get the account," said Coryn Thalmann, chief executive officer of Jimcor Agencies, a wholesaler based in Montvale, N.J. "Typically, renewals must have a credit from 5 to 15 percent to keep the account."
Jimcor is adding value by offering customers ease of use through OASIS, an online system that gives customers access to account status, premium indications, certificates of insurance and accounting statements.
The wholesaler is also focusing on product lines and additional coverage that add value and differentiation. One example is a new "silver, gold and platinum" package policy for personal lines coverage, not typically seen in the surplus lines policy, and hard-to-place coverage through Jimcor Select Risk, a team of experts for handling difficult and hard-to-place accounts.
Kevin Kelley
Lexington Insurance Co.
Boston-based Lexington, which its customers ranked the best surplus lines company of 2007, specializes in property coverage. As an arm of AIG, Lexington can offer its customers global reach, up to $1.5 billion in capacity and a wide portfolio of business, said Kevin Kelley, chairman and CEO. Targeted industries include construction, higher education, healthcare, agricultural, transportation, public entity and homeland security.
Kelley is reluctant to characterize the E&S market with a blanket generalization. "The surplus lines market is made up of several companies that operate very differently and in many cases have very different risk appetites," he said. "While some may be shrinking, others like us continue to grow, primarily because of our distribution strategy." Along with wholesalers, Lexington also deals directly with retail producers through Risk Specialists Co., also owned by AIG.
Accessing the E&S market can give producers a real competitive edge. "Customers value a producer with knowledge that sets you apart from the competition," Kelley said. "If you can offer your customers boutique services, you differentiate yourself as an innovator and a problem solver rather than just someone selling on price."
Letha Heaton
Markel Corp.
Markel Corp., Deerfield, Ill., is a global specialty insurer offering more than 80 different product lines through a network of wholesalers. Admitted markets blurring the line between standard and E&S, retail consolidation and pressure on wholesalers to deliver investment returns in a declining market have made conditions "as tough as I have seen it," said Letha Heaton, vice president of corporate marketing. However, areas including new health and information technology, foreign product importers (especially China) and coastal cat exposures remain "fairly robust."
In one of the biggest changes in its history, Markel is in the process of transforming its operating model from a product line, subsidiary-based underwriting company to a customer-facing system based in five regional locations. This approach improves delivery of Markel's wholesale products within their geographic territory. "We believe this will build on our strengths by being close to the customer, providing intelligent underwriting, and speed and ease of access for the producers in each region," Heaton said.
Tom Kuzma
Nautilus Insurance Co.
For more than 20 years, Nautilus Insurance Co., a member company of W. R. Berkley Corp., has built its reputation on providing general liability and property coverages, primarily for hard-to-place, small to midsized commercial accounts, said Tom Kuzma, president. A significant part of their book focuses on the construction business, a niche that grew after 2000 when contractors, shunned by the standard market, turned to E&S.
However, now drastically lower prices--sometimes more than half of the expiring rates--are luring much of that business back to the standard market. But this isn't necessarily a smart move for the customer. "These same insureds may end up coming back to the E&S market because at some point the same standard market could decide they don't like the exposure," Kuzma said. "E&S companies try to be steady and consistent, writing risks at terms, conditions and a premium that will generate an underwriting profit. Standard markets are driven mostly by price."
Case in point: Nautilus' presence in the troubled Florida property market. "We've never pulled out of writing wind business selectively in Florida, while standard companies come and go," Kuzma said. "We may adjust terms, conditions and pricing, but we stay. This is indicative of the E&S market. You can count on us to be there, whether the market is hard or soft."
Laura Toops is editor of American Agent & Broker.
But in spite of current conditions, the surplus lines market is in no danger of extinction. With years of accumulated underwriting and professional expertise, the E&S market is a stable and indispensable presence on the insurance landscape.
AAB spoke with experts from several top E&S insurers and other professionals to find out what they're seeing in today's business climate.
Mark Lyons and John Edack
Arch Insurance Group
"Except for D&O coverage, average E&S pricing for the industry is down 10 percent compared with last year, due to additional players and capacity in both the standard and E&S markets," said Mark D. Lyons, chairman and chief executive officer of Arch Insurance Group, New York.
To stay competitive, Arch has been developing new products and building new capabilities the past 12 months. Examples include Arch Wexford, their new excess workers' comp line, as well as a new guaranteed cost workers' comp product, a new Railroad Protective policy, and the Corporate Canopy policy, where buyers can mix and match management liability, fiduciary, D&O and EPLI coverages. "Arch is committed to innovation in support of our customers," said Lyons. "Careful risk selection remains the hallmark of Arch's business approach and the new portfolio of products we are building enables us to deliver effective solutions for these risks."
In addition, John Edack, executive vice president and chief regional officer, notes that Arch is also developing detailed regional marketing plans for industries including construction, healthcare, real estate and energy. "As part of our new small business initiative, Arch is looking at opportunities in both healthcare and executive assurance, and on the casualty side, is working closely with various Northeastern wholesalers on small-account residential business," said Edack. The company recently added offices in Philadelphia and Dallas.
Bernd G. Heinze
AAMGA
"Although many of our members are down anywhere from 5 to 10 percent from last year for renewals and premiums, a lot depends on where they're located," said Bernd G. Heinze, executive director of the American Association of Managing General Agents (AAMGA). "In coastal areas they're actually gaining business because standard companies don't want to write within 100 miles of a coastline."
In spite of insurance market cycles, E&S insurers pride themselves on their ability to consistently handle the toughest lines of business. "Wholesale market insurance professionals love to write high-risk business that can be rated, written and served," he said. "Virtually all lines of business are standard for the E&S market." A recent A.M. Best report noted that the E&S market continued to grow general and personal liability in 2007.
AAMGA recently convened a group of thought leaders from inside and outside the wholesale marketplace in a "2018 study," which will examine buying patterns, the impact of e-commerce, future opportunities and the ongoing role of agents and wholesale brokers.
Daniel F. Maher
Excess Lines Association of New York
E&S transactions and premiums are down in New York, said Daniel F. Maher, executive director, Excess Lines Association of New York. "We saw the New York excess market take off in 2001, even before 9/11," he said. Growth was consistent, with the number of transactions going from 187,500 in 2004 to 218,500 in 2007. But about three years ago the numbers started to plateau, and total taxable premium has remained in the $2.5 billion range. And while transactions are up through the first five months of 2008, premium for this period is down about 9 percent, Maher noted.
Granted, this market is unique: New York City saw 25 construction-related deaths last year, and office towers and large law firms present high risks, for which coverage is layered up in subscription policies in the nonadmitted market, Maher said.
Although it's unlikely that the E&S market will transform dramatically in a year, political changes could have an impact, Maher said. "There are now more than 80 insurance bills in Congress, including the House's efforts to move the Office of Insurance Information," he said. "We probably won't see significant federal regulation this year because of the election, but legislators are closely scrutinizing financial services, and the feds will definitely play a role in the future of insurance regulation as well."
Hugh Burgess
Fireman's Fund Insurance Co.
Fireman's Fund has more than 100 programs and $500 million in affinity sales in its Specialty Insurance and Commercial Business segments, although most of this business is in the standard commercial market.
FFIC has focused on more stable business within surplus lines that will always remain in surplus--such as product liability and accounts with losses that add a risk management plan, said Hugh Burgess, senior vice president and chief underwriting officer, specialty insurance. "There will always be insureds with losses, so this is another steady line of business for the excess market in spite of market conditions," he said.
Burgess speculated on whether first-quarter 2008 results would spur a shift to a harder market. "Cat losses for first-quarter '08 have been the greatest since 2005. With insurers seeing underwriting losses and scarce investment income, a major earthquake or hurricane could trigger a hard market. However, the industry has proven that we can go a lot longer than one quarter with losing money, so it will probably take more than that before it will change."
Coryn Thalmann
Jimcor Agencies
"We often hear from our brokers that they need the best price to get the account," said Coryn Thalmann, chief executive officer of Jimcor Agencies, a wholesaler based in Montvale, N.J. "Typically, renewals must have a credit from 5 to 15 percent to keep the account."
Jimcor is adding value by offering customers ease of use through OASIS, an online system that gives customers access to account status, premium indications, certificates of insurance and accounting statements.
The wholesaler is also focusing on product lines and additional coverage that add value and differentiation. One example is a new "silver, gold and platinum" package policy for personal lines coverage, not typically seen in the surplus lines policy, and hard-to-place coverage through Jimcor Select Risk, a team of experts for handling difficult and hard-to-place accounts.
Kevin Kelley
Lexington Insurance Co.
Boston-based Lexington, which its customers ranked the best surplus lines company of 2007, specializes in property coverage. As an arm of AIG, Lexington can offer its customers global reach, up to $1.5 billion in capacity and a wide portfolio of business, said Kevin Kelley, chairman and CEO. Targeted industries include construction, higher education, healthcare, agricultural, transportation, public entity and homeland security.
Kelley is reluctant to characterize the E&S market with a blanket generalization. "The surplus lines market is made up of several companies that operate very differently and in many cases have very different risk appetites," he said. "While some may be shrinking, others like us continue to grow, primarily because of our distribution strategy." Along with wholesalers, Lexington also deals directly with retail producers through Risk Specialists Co., also owned by AIG.
Accessing the E&S market can give producers a real competitive edge. "Customers value a producer with knowledge that sets you apart from the competition," Kelley said. "If you can offer your customers boutique services, you differentiate yourself as an innovator and a problem solver rather than just someone selling on price."
Letha Heaton
Markel Corp.
Markel Corp., Deerfield, Ill., is a global specialty insurer offering more than 80 different product lines through a network of wholesalers. Admitted markets blurring the line between standard and E&S, retail consolidation and pressure on wholesalers to deliver investment returns in a declining market have made conditions "as tough as I have seen it," said Letha Heaton, vice president of corporate marketing. However, areas including new health and information technology, foreign product importers (especially China) and coastal cat exposures remain "fairly robust."
In one of the biggest changes in its history, Markel is in the process of transforming its operating model from a product line, subsidiary-based underwriting company to a customer-facing system based in five regional locations. This approach improves delivery of Markel's wholesale products within their geographic territory. "We believe this will build on our strengths by being close to the customer, providing intelligent underwriting, and speed and ease of access for the producers in each region," Heaton said.
Tom Kuzma
Nautilus Insurance Co.
For more than 20 years, Nautilus Insurance Co., a member company of W. R. Berkley Corp., has built its reputation on providing general liability and property coverages, primarily for hard-to-place, small to midsized commercial accounts, said Tom Kuzma, president. A significant part of their book focuses on the construction business, a niche that grew after 2000 when contractors, shunned by the standard market, turned to E&S.
However, now drastically lower prices--sometimes more than half of the expiring rates--are luring much of that business back to the standard market. But this isn't necessarily a smart move for the customer. "These same insureds may end up coming back to the E&S market because at some point the same standard market could decide they don't like the exposure," Kuzma said. "E&S companies try to be steady and consistent, writing risks at terms, conditions and a premium that will generate an underwriting profit. Standard markets are driven mostly by price."
Case in point: Nautilus' presence in the troubled Florida property market. "We've never pulled out of writing wind business selectively in Florida, while standard companies come and go," Kuzma said. "We may adjust terms, conditions and pricing, but we stay. This is indicative of the E&S market. You can count on us to be there, whether the market is hard or soft."
Laura Toops is editor of American Agent & Broker.
21 2-resize-380x300-resize-380x300-resize-380x30050-crop-215x144.jpg)
